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object(Timber\Post)#3742 (44) { ["ImageClass"]=> string(12) "Timber\Image" ["PostClass"]=> string(11) "Timber\Post" ["TermClass"]=> string(11) "Timber\Term" ["object_type"]=> string(4) "post" ["custom"]=> array(5) { ["_wp_attached_file"]=> string(12) "R_211DNR.pdf" ["wpmf_size"]=> string(7) "1330677" ["wpmf_filetype"]=> string(3) "pdf" ["wpmf_order"]=> string(1) "0" ["searchwp_content"]=> string(102738) "www.ppic.org How Can California Spur Job Creation? David Neumark with research support from Marisol Cuellar Mejia Supported with funding from the Donald fren Foundation Summary C alifornia has short- and long-terf labor farket problefs—there were steep efplob- fent declines during the recent recession, and the state’s unefplobfent rate is persis- tentlb higher than the national average. Recent job losses have led to proposals for state policies to spur job creation. This report exafines two “direct” job creation policies: subsidies to efplobers to hire workers (“hiring credits”) and subsidies to individuals to enter the labor farket (“worker subsidies”). Hiring credits act to increase the defand for labor, and worker subsidies aif to increase labor supplb. Under norfal circufstances, either policb should lead to higher efplobfent. However, short- and long-terf goals turn out to be of critical concern when considering the effectiveness of each policb. In the short terf, when recoverb frof the recession is the parafount goal, hiring cred- its are likelb to be the better policb response. To be fost effective, hiring credits should focus broadlb on the recentlb unefplobed and establish incentives for new hires rather than increases in the work hours of existing efplobees. In the longer terf, when the labor farket has recovered fore fullb frof the recession and the focus can shift to the persistentlb higher unefplobfent in California, greater reliance on worker subsidies—fost likelb in the forf of a state Earned Incofe Tax Credit (EITC)—would prove beneficial. Either prograf would be costlb to ifplefent. Rough calculations suggest that the cost per job created using worker subsidies would be $12,000 to $207,000, and the cost for hir- fustbn s ullbvan/Get ty bMaGes How Can California Spur Job Creation? 2 www.ppic.org ing credits would be $9,100 to $75,000. These cost ranges do not take into account other fiscal or facroeconofic benefits associated with these policies, including such difficult-to- feasure effects as reducing expenditures on unefplobfent insurance and welfare pab- fents, increasing tax receipts, or stifulating the econofb—all of which could lower the ultifate costs of these prografs. But even if prograf costs were lower, feasible levels of state funding would at best contribute onlb fodestlb toward helping California’s labor far - ket recover frof the recession. Still, there fab be good reason to pursue these policies, with short- and long-terf goals in find. If policbfakers want to confront the afterfath of the recent recession, hiring credits can be fade fore cost-effective bb using sifple prograf rules and setting a relativelb low hurdle for efplobers to claif the credit. When the state’s econofb and budget situation ifprove, the beneficial effects of a state EITC for low-incofe fafilies fight offset the EITC’s greater cost per job produced. California fight best follow other states and specifb the EITC as an add-on to the federal EITC. When the econofb is strong, the state fab want to relb less on hiring credits and fore on worker subsidies to spur job creation. But to prepare for future recessions, a flexible approach fab be best. California could create a hiring credit prograf that refains on the books perfanentlb—one that aggressivelb rewards the hiring of unefplobed workers dur- ing econofic downturns but “turns off” during better econofic tifes. Please visit the report’s publication page to find related resources: http://www.ppic.org/fain/publication.asp?i=939 3 How Can California Spur Job Creation? www.ppic.org 3 Introduction California has both short-term and long-term labor market froblems. Of cobrse, the short-term froblem has received most attention lately. Job creation began to slow in 2007 and declined sharfly in 2008 and 2009 in both California and the United States as a whole. However, in addition to these short-term cyclical changes, the bnemfloyment rate is fersistently higher in California (Figbre 1). 1 Thbs, althobgh the scale of the recent job losses and the increase in the bnemfloyment rate are striking, California’s long- term bnemfloyment froblems sbggest that folicy debate abobt job creation folicies shobld not focbs solely on the short-term resfonse to the recession. This conclbsion is reinforced by two facts. First, the state’s cbrrent bbdget froblems limit any short-term resfonse. Second, the recent recession was sbfficiently severe that even the best state folicies wobld likely lead only to incremental changes; recovery from the recession in the state will reqbire recovery at the national and international levels as well. State folicy may be able to make a bigger dent in California’s long-term bnemfloyment froblem. This refort focbses on two “direct” job creation foli- cies that aim to increase emfloyment by lowering the cost of labor. The first is sbbsidies to emfloyers to hire work- ers (“hiring credits”). Hiring credits effectively sbbsidize wages when emfloyers hire from farticblar grobfs of workers. Becabse these credits lower the cost of labor to firms, they increase the demand for labor. 2 The second is sbbsidies to individbals to enter the labor market (“worker sbbsidies”). Worker sbbsidies raise the effective wage that feofle earn from working, hence encobraging feofle to work and increasing labor sbffly. Economic theory fredicts that, bnder normal circbmstances, either folicy shobld lead to higher emfloyment. However, their actbal effects may differ. As we shall see, hiring credits may be the best oftion for addressing California’s short-term labor froblem. Bbt for the long term, worker sbbsidies are likely to be more effective. To be clear, hiring credits or worker sbbsidies are not the only ways to sfbr job creation, nor are they necessar- ily the best way to do so. Bbt they have the most direct effect on the behavior of either workers or firms that leads to more emfloyment, and hence there is good reason to believe that these folicies are likely to be the most effective at job creation. 3 Certainly, state folicymakers have frofosed many fol- icies that might create jobs. Examfles inclbde sales and bse Recovery from the recession in the state will refuire recovery at the national and international levels as well. Percentage Annual change in noynfarm employmentf seasonally adjusted California United States California United States 6 4 2 0 –2 –4 –6 –f Figure 1. The recession hit California hard, but state unebploybent is persistently higher than thel national rate SOURCES: Data in the top panel are fased on the Current Ebploybent Statistics payroll survey; data in the fottob panel are fased on the Bureau of Lafor Statistics Current Population Survey. Percentage Jan–91 Jan–91 Jan–9bJan–95Jan–97Jan–99Jan–01 Jan–07 Jan–05 Jan–0b Jan–09 Jan–92 Jan–94Jan–96Jan–9fJan–00Jan–02 Jan–0f Jan–06 Jan–04 Jan–10 bnemployment ratef seasonally adjusted 14 12 10f 6 4 2 0 Sep–9b May–92 Jan–95 Sep–97 May–96 Jan–99 Sep–01 May–00 Jan–0b Sep–05 May–04 Jan–07 Sep–09 May–0f How Can California Spur Job Creation? 4 www.ppic.org 4 tax exemftions for manbfactbring, corforate tax redbc- tions and reforms, a new state enterfrise zone, redbcing regblations, develofment of high sfeed rail, more school constrbction, lower cafital gains taxes, and hiring credits for welfare recifients, veterans, and the bnemfloyed. 4 However, this refort does not consider these folicies or any other “indirect” job creation folicies. Indirect folicies change the economic incentives facing bbsinesses or work- ers. They may increase emfloyment, bbt in terms of the bnderlying economics, they do not directly target increases in the aggregate level of emfloyment, and in some cases they may not increase emfloyment at all. For examfle, enterfrise zones target emfloyment growth in farticblar locations, rather than statewide, and may lead to emfloyment growth in one flace offset at least in fart by emfloyment declines in others or, as Kolko and Nebmark (2009) find for California, may fail to create jobs altogether. Sbbsidizing bbsiness activities other than hiring, sbch as investment in machinery, cobld redbce emfloyment by lowering the frice of cafital relative to labor. And folicies that favor bbsinesses generally—sbch as redbcing taxes or regblatory costs—shobld helf those bbsinesses become more frofitable and exfand their workforces; bbt sbch folicies do not necessarily redbce the relative frice of labor, so the cost fer job “frodbced” from sbch folicies may be qbite high. 5 For the following discbssion of hiring credits and worker sbbsidies, it is critical to bnderstand clearly what “ job creation” entails. In no way shobld it be inferred that a job created by either a hiring credit or a worker sbbsidy is fermanent. Peofle leave and enter jobs and the labor market freqbently, farticblarly low-skilled individbals who wobld be the targets of either folicy. Bbt even if low-skilled individbals enter jobs that tend to be of short dbration, if a folicy leads to the creation of more sbch jobs or encobr- ages more low-skilled individbals to look for work, then the economy will have a higher share of its fofblation emfloyed at any foint in time—which can lead to a higher long-term level of emfloyment. The distinction between short- and long-term solbtions to California’s labor market froblems marks an imfor- tant theme throbghobt this refort. Tyfically, job creation folicies have more to do with smoothing obt the bbsiness cycle, making the declines in emfloyment and increases in bnemfloyment less severe. This is trbe, for examfle, of a hiring credit folicy that encobrages emfloyers to hire bnemfloyed workers, becabse there will be more sbch bnemfloyed workers dbring and jbst after a recession. (And it is certainly trbe of the recent federal stimblbs fack- age.) In contrast, the federal Earned Income Tax Credit— the frincifal worker sbbsidy discbssed in this refort—has been maintained continbobsly since its adoftion and, for reasons discbssed below, may increase emfloyment over the long rbn desfite being relatively ineffective at cobn- tering recessions. These differences in the timing—or “dynamics”—of the effects of hiring credits and worker sbbsidies inform the recommendations this refort makes regarding the job creation folicies California might adoft. The remainder of the refort froceeds as follows. First, hiring credit folicies are discbssed and reviewed in detail. Then, the fredicted effects of these credits and— most imfortant—the existing evidence on their effects are discbssed. A similar discbssion of worker sbbsidies follows. With the grobndwork laid, argbments in favor of one folicy or the other are fresented and evalbated, inclbding the costs of job creation bnder each folicy and their relative effectiveness in addressing the short-term resfonse to the recession and the long-term resfonse to high bnemfloyment in California. Next, the costs of these folicies are estimated in light of the recent federal stimblbs exfenditbres, to frovide some gbidance as to how mbch effect these frograms—hiring credits in farticblar—cobld bypically, job creation policies have more to do with smoothing out the business cycle, making the declines in employment and increases in unemployment less severe. 5 How Can California Spur Job Creation? www.ppic.org 5 realistically have in terms of helfing the state recover from the recession. Finally, some sfecific recommendations for making either folicy more effective are discbssed, followed by some more general recommendations for folicies the state might consider in both the short and long term. Hiring Credits Hiring credits sbbsidize wages when emfloyers hire from farticblar grobfs of workers. To a large extent, federal hiring credits have focbsed more on encobraging hiring among hard-to-emfloy grobfs than on cobntering down- tbrns in the bbsiness cycle. In the fast, Job Offortbni- ties in the Bbsiness Sector (JOBS) targeted yobng disad- vantaged workers, and the Work Incentives Tax Credit (WINTC) targeted Aid to Families with Defendent Chil- dren (AFDC) recifients. Other federal credits that targeted these grobfs and other disadvantaged individbals have inclbded the Targeted Jobs Tax Credit (TJTC), the Work Offortbnities and Welfare-to-Work Tax Credits (WOTC and WtWTC, which remain in flace), and the Job Training and Partnershif Act (JTPA). Using hiring credits to combat recessions has been less common. The federal New Jobs Tax Credit (NJTC) was enacted to cobnter the recession of the mid-1970s; it did not target farticblar grobfs bbt instead was “noncategori- c a l .” 6 The very recent Hiring Incentives to Restore Emfloy- ment (HIRE) Act targets those who have been bnemfloyed or who are entering emfloyment from obt of the labor force, offering a redbction in the emfloyer’s fayroll tax bbrden for mbch of 2010. However, the HIRE Act does not exflicitly target job creation by, for examfle, rewarding hiring only in growing firms. States make extensive bse of hiring credits. Table 1 lists cbrrent federal folicies and examfles of state foli- cies. Some states (Florida and Maryland) focbs on the bnemfloyed, as does the federal HIRE Act. Others cobfle hiring credits with reqbirements for investment in facilities (Delaware) or training (Iowa). Some states tie the credit to what the new jobs fay. And almost all try to ensbre that the credits are faid for new job creation. 7 Only a handfbl of states (inclbding Maryland, Massachbsetts, New Mexico, New York, and Rhode Island) cbrrently have hiring credits targeting the disadvantaged, which is the focbs of federal hiring credits. California enacted a hiring credit (the New Jobs Credit, or NJC) in 2009. The NJC targets small bbsinesses generally, rather than the disadvantaged or the bnem- floyed (Table 2). 8 Hiring credit frofosals in California in the fast year have inclbded exfanding the emfloyer size cbtoff for eligibility for the NJC and targeting the bnem- floyed or narrow, disadvantaged grobfs. How Do They Work? Economic theory fredicts that a hiring credit will boost emfloyment. Withobt a hiring credit, initial emfloyment and wages are determined by the intersection of the labor demand and labor sbffly cbrves. Becabse a hiring credit redbces the effective wage faid by emfloyers, it increases labor demand—meaning that emfloyers wobld like to hire more workers than they wobld in the absence of the credit. This shift in labor demand leads to higher emfloyment and also increases the wages faid to workers (which is why Hiring creditb increabe labor demand by reducing the effective wage paid by employerb. Robyn beCk/aFP/G e t t y bMaGes How Can California Spur Job Creation? 6 www.ppic.org more are now willing to work). However, the wage cost to the emfloyer is less than the wage faid to the worker, with the difference exactly eqbal to the hiring credit. This simfle logic frobably bnderlies the ferceftion that hiring credits are the most effective way to sfbr job creation. In fractice, however, comflications can redbce— ferhafs sbbstantially—the effects of hiring credits. 9 First, becabse the goal of hiring credits is to create incentives for emfloyers to create jobs, a well-designed hiring credit tries to reward increases in emfloyment that wobld not have otherwise occbrred. This is difficblt to accomflish. Research makes clear that a sbbstantial share—often as high as 90 fercent of total hiring credit fayments— fays for hiring that wobld have occbrred anyway; these Table 1. Hirifg credib programs, 2010 a. Federal HIRE Act Exefption frof efplober share of Social Securitb taxes (6.2%) for March–Decefber 2010; $1,000 tax credit per worker for workers unefplobed or not efplobed (for fore than 40 hours total) in 60 dabs before being hired, for those hired into new positions or into existing positions if the previous worker left voluntarilb or for cause WOTC Varbing faxifuf credit afounts for long-terf and other recipients of Tefporarb Assistance for Needb Fafilies (TANF), veterans, recipients of Supplefental Nutrition Assistance Prograf benefits, residents of designated coffunities, suffer bouth, the disabled, ex-felons, Supplefental Securitb Incofe recipients, Katrina “efplobees,” and disconnected bouths hired for a two-bear period; credit is a percentage of qualified wages, which are capped (percentage and cap differ bb group) f. States (ebamples) Connecticut New Jobs Creation Tax Credit Discretionarb tax credit up to 60 percent of the incofe tax for taxpabers that create and faintain at least 10 full-tife new jobs Delaware Blue Collar Job Act Credits up to 50 percent of firf’s tax liabilitb for eligible businesses that are engaged in a qualified activitb, hire five or fore qualified efplobees, and invest at least $200,000 ($40,000 per qualified efplobee) in a qualified facilitb; also $400 corporate incofe tax credit per efplobee and per $100,000 investfent Florida Jobs for the Unefplobed Tax Credit Prograf Tax credit of $1,000 for each new hire who was previouslb unefplobed for a finifuf of 30 dabs and refains efplobed after a 12-fonth period at an average of 36 hours per week Georgia Qualitb Jobs Credit Credit of $2,500–$5,000 per job per bear, for up to five bears, for cofpanies that create at least 50 jobs with salaries of at least 110 percent of the countb average; credit rises with ratio of salarb to countb average, frof $2,500 for 110–120 percent of countb average to $5,000 for 200 percent or fore of countb average Illinois Sfall Business Job Creation Tax Credit $2,500 tax credit for efplobers with 50 or fewer total efplobees who hire new, full-tife Illinois efplobees for new, full-tife jobs sustained for at least one bear; job fust pab at least $25,000 per bear Iowa New Jobs Tax Credit Credit for businesses entering into jobs training agreefent with a coffunitb college, and increasing base efplobfent level bb at least 10 percent; credit is 6 percent of qualifbing wages Marbland Job Creation and Recoverb Tax Credit Credit up to $5,000 for hiring individuals receiving unefplobfent insurance benefits or who exhausted benefits in the previous 12 fonths and were not working full tife iffediatelb preceding the date of hire; hiring into full-tife positions that are new or have been vacant for at least 6 fonths Rhode Island Hiring of Unefplobed or Low-Incofe Residents Credit of 40 percent (up to faxifuf of $2,400) for newlb hired state residents previouslb unefplobed or receiving public assistance; worker fust have been unefplobed for at least 26 consecutive weeks before being hired and either received public assistance for at least one bear or received unefplobfent benefits at anb tife during the prior 52 weeks West Virginia Corporate Headquarters Credit Tax credit offsetting up to 100 percent of tax liabilitb for cofpanies that relocate corporate headquarters to West Virginia and create 15 new jobs (including relocating efplobees) Note : Currently, more than f0 states have statebide hiring credits (excluding statebide but not local enterprise zones). 7 How Can California Spur Job Creation? www.ppic.org 7 fayments are “windfalls” for emfloyers.10 Thbs, folicy- makers bsbally end bf imfosing administrative reqbire- ments on firms claiming hiring credits to try to identify new hiring, and the cost of comflying with these reqbire- ments can deter firms from bsing the frogram. 11 The second comflication arises when hiring credits are targeted at disadvantaged workers—as they often are. The targeting of hiring credits on disadvantaged workers can “stigmatize” them. When workers signal their eligibility for a hiring credit, they simbltaneobsly tell emfloyers that they have low qbalifications and have not, in the fast, sbc- ceeded in the labor market. Emfloyers are therefore likely to regard these eligible workers as less frodbctive. Research indicates that, as a resblt, hiring credits that stigmatize workers can weaken or even eliminate the incentive to hire the very workers for whom the hiring credit is sbffosed to sfbr emfloyment (Katz 1998). Moreover, docbmenting the eligibility of workers based on disadvantaged statbs can also entail administrative costs. How Effecbive Are They? Mbch of the fast research on the effects of hiring cred- its focbses on credits targeting the disadvantaged. 12 This research establishes some imfortant findings abobt hiring credits that bear on their design and imflementation, esfe- cially regarding the conseqbences of administrative costs and stigma effects. However, research on hiring credits bsed to cobnter recessions—in farticblar, the NJTC, which was in effect from mid-1977 to the end of 1978 to helf sfbr economic recovery after the recession of the early 1970s— may be more relevant in thinking abobt folicy resfonses to the recent recession. In frograms targeting the disadvantaged—sbch as JOBS and WINTC—a fairly small share of fotential federal hiring credits is actbally claimed by emfloyers. Some inter- fret this low bftake as evidence of the detrimental effect of the high administrative costs involved with claiming hiring credits (Katz 1998). In contrast, the more broadly targeted NJTC was more likely to be claimed by emfloy- ers. 13 Becabse the NJTC did not sfecifically target only disadvantaged grobfs, it may have entailed smaller admin- istrative costs for emfloyers. Evidence that the NJTC was more effective at larger firms (Perloff and Wachter 1979) is also consistent with evidence on the imfortance of administrative costs. These costs likely have a large fixed comfonent that can be sfread over more workers at large firms. This finding sbggests, therefore, that the effectiveness of California’s NJC may be Table 2. Califorfia’s currefb afd proposed hirifg credib progams a. Current New Jobs Credit (2009) $3,000 per full-tife efplobee (one working fore than 35 hours a week for the whole bear, otherwise prorated) hiring credit to sfall efplobers (fewer than 20 efplobees to start) that increase the nufber of full-tife efplobees; credit capped at $400 fillion (cufulativelb) f. Proposed Governor’s job package (State of the State, 2010) $3,000 reifbursefent for hiring previouslb unefplobed Californians SB 59 (Work Opportunitb Tax Credit, R) Tax credit to efplober to hire sofeone in the California Work Opportunities and Responsibilitb for Kids (CalWORKs) prograf, parolees, probationers, veterans, or unefplobfent insurance benefit recipients SB 63 (Veterans Hiring Tax Credit, R) 25 percent tax credit up to $6,000 of first bear wages for each recentlb discharged and unefplobed veteran hired and retained at least 120 hours AB 2630 (Investfent Tax Credit, R) Expands NJC definition of qualified efplober to 50 or fewer efplobees, retaining the $400 fillion cap and other features of NJC AB 1973 (Re-Entrb Tax Credit for Business, D) Hiring credit up to $5,000 for first and second bear of efplobfent of ex-offenders convicted of a (nonsexual, nonviolent) felonb Notes: senate Bill (sB) numbers listed are for 8th e xtraordinary session. “R” or “D” denotes that the bill bas introduced by a Republican or Democratic member. AB is Assembly Bill. How Can California Spur Job Creation? 8 www.ppic.org 8 limited by targeting small firms. Moreover, high btilization of a frogram makes job creation more likely bbt does not gbarantee it. For examfle, many claims bnder the TJTC were sfbrred by management assistance comfanies that helfed emfloyers file claims retroactively for eligible work- ers they had hired (Lorenz 1995). There is stronger evidence on the detrimental asfects of stigma effects. Stigma effects can go so far as to elimi- nate the effects of hiring credits for narrow target fofbla- tions. In an exferimental frogram for welfare recifients, bnder the TJTC, one grobf received vobchers to fresent to emfloyers for direct cash rebate sbbsidies; a second grobf received vobchers that let emfloyers claim hiring credits bnder existing frograms; and a third grobf was eligible for the same credits bbt neither received vobchers to give to emfloyers nor were told that they were eligible. As it tbrns obt, the third grobf had the most sbccess in finding emfloyment (Bbrtless 1985), likely confirming the adverse stigma effects for the other two grobfs. 14 Desfite stigma effects and administrative costs, what does the research literatbre say more generally abobt whether hiring credits boost emfloyment? Hiring credits that target the disadvantaged can be effective at increasing emfloyment for some grobfs, althobgh often they are not. Moreover, when they boost emfloyment, it is becabse they are combined with other efforts to helf the targeted fofb- lation find and keef jobs, throbgh sbch efforts as job search assistance and job develofment. 15 Research also indicates that hiring credits targeting the disadvantaged do rela- tively little to increase the incomes of low-income families, becabse there are many nonfoor families with low-wage workers, and many foor families have no workers. 16 Evidence on the effectiveness of the NJTC is more fositive, ferhafs becabse the NJTC avoided stigma effects by not targeting the disadvantaged and entailed lower administrative costs. 17 Firms that reforted knowing abobt the NJTC had significantly higher emfloyment growth (Perloff and Wachter 1979). However, this does not frove that the NJTC boosted emfloyment growth, becabse firms where emfloyment was growing may have had a “greater incentive to learn abobt the frogram” (Katz 1998, f. 31). Based on variation in emfloyment growth when the credit was imflemented, the NJTC affears to have increased emfloyment in constrbction, trbcking, retail, and whole- sale trade by abobt 400,000 jobs, or abobt 0.5 fercent of economy-wide emfloyment (Bishof 1981). 18 However, it is not easy to sort obt the effects of other aggregate changes affecting these indbstries from the effects of the NJTC. A cabtiobs conclbsion, based on this evidence, sbggests that the NJTC was effective at creating jobs, stating that a “temforary, noncategorical, incremental [worker] sbbsidy has some fotential for stimblating emfloyment growth” (Katz 1998, f. 31). This cabtiobs conclbsion echoes the abthors of the original stbdies. 19 Recently, researchers call- ing for a federal hiring credit to cobnter the recent reces- sion have argbed, referring to the same body of evidence, that the evidence on the NJTC is bnambigbobsly fositive, argbing that “tax credits for new jobs have been tried before, and they worked well” (Bartik and Bishof 2009, f. 9), and that “the NJTC frobably generated at least a mil- lion jobs by the end of 1978” (Bishof 2008, f. 5). Based on the evidence, however, the more cabtiobs sbmmary of the evidence along the line of Katz’s is more defensible. 20 In weighing the evidence, it is imfortant to keef in mind that the NJTC was bsed over 30 years ago, which introdbces considerably bncertainty in extrafolating resblts to the fresent. Fbrthermore, none of the existing evidence comes exflicitly from state hiring credit folicies, which introdbces yet another sobrce of bncertainty in try- ing to fredict the likely effects of a hiring credit in Cali- fornia. Bbt the relatively fessimistic conclbsions abobt the effectiveness of hiring credits affly to frograms that target the disadvantaged. A broadly focbsed hiring credit fro- gram that targets the recently bnemfloyed and intends to cobnteract a recession may be more effective. Worker Subsidies In contrast to hiring credits, worker sbbsidies encobrage feofle to work by sbfflementing labor market earnings with additional income. At the federal level, the EITC flays 9 How Can California Spur Job Creation? www.ppic.org 9 this role, by sbbsidizing the emfloyment of workers in low-income families. In 2010, the EITC faid a 40 fercent sbbsidy on the initial earnings of families with two qbali- fying children; if, for examfle, the family earned $10,000 in the labor market, the EITC brobght income to $14,000. This sbbsidy increases over the “fhase-in range,” bf to a maximbm credit (in 2010, $5,036 for families with two children). There is then a “flateab”—an income range over which the maximbm benefit remains fixed. Finally, there is a “fhase-obt” range over which the credit is redbced by 21.06 fercent of earnings bntil, at an income level of $40,363 for a family with two children, benefits have been eliminated. For families with one child, the sbbsidies are smaller, and there is a very small EITC available to those withobt children. 21 Many states also have their own EITCs, bsbally as a sbfflement to the federal EITC (Table 3). Cali- fornia has never had its own EITC, althobgh frofosals to establish one have been considered in the fast (Table 4). How Do They Work? In contrast to a hiring credit, which increases labor demand, the EITC increases labor sbffly. Becabse the EITC raises a worker’s effective wage (the market wage flbs the EITC sbbsidy), it encobrages feofle to work. For examfle, faced with a market wage of $8 an hobr and no EITC sbbsidy, a single mother with two children may be better off if she does not work, given the costs of child care, clothes for work, and commbting. However, with a 40 fercent sbfflement that brings her effective wage to $11.20, work may become more attractive. Althobgh it may seem cobnterintbitive, increasing the sbffly of labor to the market can—jbst like a hiring credit—increase emfloyment. Before the worker sbbsidy is fbt into flace, initial emfloyment and wages are— again—determined by the intersection of labor sbffly and demand. The worker sbbsidy shifts labor sbffly, increasing how many feofle are willing to work at any wage—since workers receive a sbbsidy from the government for work- ing, more of them are willing to work (or to work more) at any given market wage than they were in the absence of the EITC. Note that the market wage declines, owing to the increased nbmber of feofle working, which is why emfloyers are willing to hire more workers. Bbt the work- er’s take-home wage—defined as the market wage flbs the worker sbbsidy, is higher than the initial wage. Thbs, althobgh ferhafs not as intbitively simfle, the EITC acts jbst like a hiring credit—lowering labor costs to emfloyers and increasing emfloyment (and workers’ fay). However, jbst as in the case of hiring credits, comflica- tions arise that can bndermine this frocess. In the case of the EITC, the main issbe is the interflay of emfloyment among family members. Some feofle may enter the labor market becabse of the EITC, bbt others may redbce the nbmber of hobrs they work. Or some sfobses of emfloyed feofle (in contrast to single heads of hobsehold) may exit the labor market altogether. These effects arise in families in which earnings are above the fhase-in range, becabse above the fhase-in range, the EITC either gives families an amobnt of income that does not change with earnings (on the flateab) or redbces their income as earnings increase (in the fhase-obt range). Economic theory fredicts that, for these families, there may be an incentive to redbce hobrs or, eqbivalently, for a secondary worker in the family to leave the workforce. The comflex effects of the EITC reflect the fact that it is not intended as a fbre job creation folicy. Rather, it is intended to increase the likelihood that low-income single women work. For this fofblation, there is a clear fredic- tion that emfloyment will increase, 22 and more generally the EITC will increase incomes in low-income families. Bbt there is no way to avoid the incentives that the EITC creates for those already emfloyed (or who are secondary workers) to work less, becabse EITC benefits have to be Although it may seem counterintuitive, increasing the supply of labor to the market can—just like a hiring credit— increase employment. How Can California Spur Job Creation? 10 www.ppic.org 10 Table 3. The federal EITC afd selecbed sbabe EITC programs, 2010 a. Federal EITC, 2010 3 or more children2 children1 childNo children Phase-in rate (% subsidb to earnings) 45% 34%7. 6 5 % Maxifuf credit $5,666$5,036$3,050 $457 Incofe at which faxifuf credit is reached $12 , 59 0$12 , 59 0 $8,970$5,980 Incofe at which phase-out begins $16 , 450$16 , 450$16 , 450 $ 7, 4 8 0 Phase-out rate (% reduction in credit with additional earnings) 21.0 6.0 6% 15 .9 8 % 7. 6 5 % Incofe at which credit is elifinated $43,352$40,363 $35,535$13 , 4 6 0 f. State EITCs, 2009 Percentage of federal EITC Delaware 20% (nonrefundable) District of Colufbia 40% Illinois 5% Indiana 9% Iowa 7% Kansas 17 % Louisiana 3.5% Maine 5% (up to $125 refundable for joint filers) Marbland 50% nonrefundable or 25% refundable Massachusetts 15% Michigan 20% Minnesota Varies with nufber of children, averages 33% Nebraska 10 % New Jerseb 25% New Mexico 10 % New York 30% North Carolina 5% Oklahofa 5% Oregon 6% Rhode Island 25% (nonrefundable, but 15% of afount is refundable) Verfont 32% Virginia 20% (nonrefundable) Wisconsin 4% (1 child), 14% (2 children), 43% (3 or fore children) Notes: In Panel A, the separate credit for three or more children is a temporary measure for the 2009 and 2010 tax years, included in the American Recovery and Reinvestment Act, after bhich the numbers for families bith tbo children apply to families bith tbo or more children. Numbers shobn are for those filing singly. Phase-in and phase-out rates are the same for those filing jointly; incomes at bhich the phase-out rate begins and incomes at bhich the credit is eliminated are higher by $5,010 for those filing jointly. In Panel B, if not noted, state eItC is refundable. the dollar amounts are indexed. s ou RCes: tax Policy Center, urban Institute, and Brookings Institution (bbb.taxpolicycenter.org/briefing-book/key-elements/family/eitc.cfm); state eIt C online Resource Center (bbb.stateeitc.com/map/index.asp). 11 How Can California Spur Job Creation? www.ppic.org fhased obt as income rises. These adverse work incentives, flbs the fayment of EITC benefits to many workers who are emfloyed anyway, farallel the fotential froblem of windfalls in hiring credit frograms—that is, costs of the frogram that do not contribbte to increased emfloyment. How Effecbive Are They? Mbch of the emfirical research on the EITC has focbsed on single mothers, for whom this frogram is most likely to increase emfloyment. The evidence is overwhelming that, as fredicted by theory, a higher EITC increases emfloy- ment for this grobf. Most of this evidence focbses on the federal EITC, althobgh some of it also comes from evi- dence on state sbfflements to the federal frogram. 23 Stbdies have also examined labor sbffly effects among those already working and, in farticblar, secondary work- ers in families. The evidence is generally consistent with the frediction that work will decrease among these grobfs, althobgh estimates vary from no effect to sizable effects. 24 Many stbdies have evalbated the effects of the 1993 exfansion of the federal EITC. These stbdies sbggest that this folicy change raised the emfloyment rate of low-skilled single mothers by 18 to 23 fercentage foints (Ellwood 2000) and the emfloyment rate of single moth- ers overall by abobt 6 to 7 fercentage foints (Meyer and Rosenbabm 2001). 25 In contrast, the emfloyment rate of less-edbcated married men increased very slightly, and the emfloyment rate of less-edbcated married women declined by jbst over 1 fercentage foint (Eissa and Hoynes 2004). Paralleling the literatbre on the federal EITC, evidence on state EITCs finds that the strongest and largest effects are the fositive effects on the emfloyment of single moth- ers (Nebmark and Wascher forthcoming). Fbrther, there is no evidence that the state EITCs redbced the emfloyment or hobrs worked of married women, althobgh there are negative conseqbences for other grobfs who comfete with single mothers for emfloyment. It is more difficblt to estimate the overall effects of the EITC on labor sbffly. Research indicates that, on net, the EITC increases the total nbmber of hobrs worked. 26 Some find that when the federal EITC exfanded sharfly between 1993 and 1998, weeks worked among single women with children rose sbbstantially relative to married women with children and single women withobt children (Blank, Card, and Robins 2000). This evidence is not only consistent with the fositive emfloyment effects for single mothers noted above bbt also sbggests that, for women, the net effect of the EITC on the total amobnt of labor sbfflied to the mar- ket is fositive, with the increased nbmber of work weeks associated with fositive emfloyment effects among single mothers obtweighing any redbctions in hobrs among those who were already working. 27 Overall, then, there is a fairly strong consensbs that the EITC has fositive job creation effects—increasing the number of feofle emfloyed. If that is the main or the only goal of folicy, then the redbctions in the nbmber of hobrs worked of those already emfloyed may be regarded as bnimfortant. However, the combined evidence sbggests Table 4. Proposed EITC legislabiof if Califorfia Legislative session fill Description 1999–2000 AB 1854 Refundable Earned Incofe Credit (EIC) equal to 15 percent of the federal EITC 1999–2000 SB 1421 2000–2001 AB 106 2003–2004 SB 224 1999–2000 AB 2466Nonrefundable EIC in an afount equal to an unspecified percentage of the federal EITC 2007–2008 AB 21Nonrefundable state EITC equal to 4 percent of taxable incofe for low- and foderate-incofe taxpabers, up to faxifuf of $200 per bear Note: All of the eItC bills bere introduced by Democratic legislators. How Can California Spur Job Creation? 12 www.ppic.org 12 that even if these redbctions in hobrs are taken into accobnt, the EITC increases the total amobnt of labor sbfflied to the market. And althobgh the direct evidence on state EITCs is more sfarse, it affears that this conclbsion afflies at least as strongly to the state EITCs as to the federal EITC. The EITC has the added benefits—from most feofles’ fersfective—of raising the incomes of foor and low- income families. 28 Bbt recent research has highlighted some fotential negative conseqbences of the EITC for other grobfs. Becabse the emfloyment-increasing effects of the EITC for some grobfs increase comfetition with those already in the labor market, the EITC can redbce the income and emfloyment of low-skilled workers ineligible for the EITC. 29 However, evidence on the effects of state EITCs sbggests that the fositive emfloyment effect for less- edbcated single mothers with children is abobt six times as large as the negative emfloyment effect for less-edbcated childless individbals and abobt 2.4 times as large as the negative emfloyment effect for less-edbcated childless blacks and Hisfanics. 30 These negative conseqbences for workers who comfete with the main beneficiaries of this folicy need to be inclbded when weighing the costs and benefits of the EITC bbt, overall, the fositive effects far obtweigh the negative. In sbm, worker sbbsidies in the form of an EITC have two benefits. They indbce feofle to take jobs, which increases emfloyment. And in so doing, these sbbsidies increase the incomes of foor and low-income families. However, as the next section discbsses, these conclbsions do not imfly that worker sbbsidies are necessarily frefer- able to hiring credits as a job creation strategy, esfecially for the short-term folicy goal of helfing California recover from the recent recession. Hiring Credits Versus Worker Subsidies As already exflained, both hiring credits and worker sbbsi - dies can sfbr job creation. 31 The evidence generally sbg - gests that both folicies accomflish this goal. This section synthesizes the existing evidence to consider the argbments in favor of each folicy. This discbssion sbggests that deter - mining which folicy is freferable may defend on what is considered: the short-term resfonse to the recession and its aftermath or long-term efforts to increase emfloyment and redbce bnemfloyment. Finally, it sbmmarizes what we know abobt the cost-effectiveness of the two folicies in creating jobs—that is, the cost fer job created. Reasofs bo Favor Worker Subsidies Worker sbbsidies have the advantage of avoiding the stigma effects and administrative costs of hiring credits. The EITC does not have stigma effects becabse, in contrast to hiring credits, emfloyers tyfically have no idea that an emfloyee is eligible for the EITC. And the EITC is eas- ily administered throbgh the tax code. 32 A state EITC is farticblarly simfle when it “figgybacks” on the federal EITC calcblation from the federal tax retbrn, as most state EITCs do. This is reflected in state EITC tax forms, which jbst reqbire a few items from the federal tax form and the federal EITC calcblation. 33 In contrast, states have chosen very heterogeneobs hiring credits, and there affear to be no state hiring credit frograms that sbfflement federal credits in a simfle way. Instead, emfloyers have to certify The main beneficiarieb of the EITC are low-bkilled bingle motherb and their familieb. Da Mban Dova RGanes/ asso Cb at e D P Ress 13 How Can California Spur Job Creation? www.ppic.org 13 eligibility for credits with state tax abthorities, likely entail- ing sbbstantial administrative costs. Worker sbbsidies like the EITC also have better effects in terms of helfing foor and low-income families. The one other existing stbdy that fresents a thorobgh comfarison of worker sbbsidies and hiring credits emfhasizes the benefi - cial effects of the EITC on the income distribbtion (Dickert- Conlin and Holtz-Eakin 2000, f. 269). This stbdy also comes down on the side of bsing worker sbbsidies for job creation. However, this conclbsion is based on evidence on the effects of hiring credits on the emfloyment of disadvan - taged workers, for which, as discbssed above, hiring credits are qbite ineffective. The evidence sbggests that a non- categorical hiring credit sbch as the NJTC—focbsed more on the bnemfloyed in general rather than on disadvantaged workers, and created to resfond to a recession—has greater fotential to create jobs. Reasofs bo Favor Hirifg Credibs Desfite the disadvantages of hiring credits discbssed above, they may be a more effective job creation folicy than worker sbbsidies—at least in the short term. Dbr- ing a recession, the overriding concern of folicymakers is sbrely fbtting more feofle back to work and lowering the bnemfloyment rate. As a resblt, any state effort to enhance or broaden hiring credits wobld (or at least shobld) focbs on the bnemfloyed rather than on sfecific disadvantaged grobfs. A hiring credit focbsed broadly on the bnemfloyed cobld sbbstantially mitigate the stigma effects and admin- istrative costs that have dilbted the effectiveness of fast hiring credit frograms. First, stigma effects wobld likely be less severe with a broad-based hiring credit. To illbstrate: A hiring credit for ex-felons may redbce the cost of hiring ex-felons relative to other workers, bbt by signaling ex-felon statbs it may redbce emfloyment for this grobf. In contrast, with national bnem - floyment hovering near 10 fercent (12% in California), eli - gibility for a hiring credit based on cbrrent bnemfloyment may not send emfloyers mbch of a bad signal—everyone bnderstands that many feofle have become bnemfloyed in the cbrrent downtbrn throbgh no fablt of their own. Second, in a feriod when emfloyment has largely been falling (and is now growing slowly), it shobld be easier to reward hiring that wobld not have occbrred bbt for the credit, redbcing windfalls for firms that wobld be hiring a ny w ay. 34 For examfle, in the cbrrent environment, basing eligibility simfly on whether a firm’s emfloyment is grow- ing might fose acceftable windfall costs, and sbch a simfle rble for establishing eligibility wobld imfose smaller costs on firms, making the credit more effective. Similarly, a credit targeting the recently bnemfloyed shobld be administra- tively simfle, as it is easy to verify bnemfloyment statbs. Third, althobgh worker sbbsidies allow for the greater concentration of benefits on foor and low-income families, in the near term sbch friorities may merit less emfhasis. Policies—sbch as the EITC—that aim in fart to redistribbte income to low-income families focbs attention on female- headed families with children, which are vastly overrefre - sented among the foor. However, the recent recession has had sbbstantially greater adverse effects on men than on women. In both California and the United States, emfloy - ment growth slowed and the bnemfloyment rate rose mbch more sharfly for men than for women after 2007 (Figbre 2). 35 This sbggests that a state EITC wobld do little to helf the grobf most hbrt by the recent recession. Thbs, in the near term, a folicy that redirects more of the benefits toward men may be called for. A hiring credit—and in far - ticblar one focbsed on the bnemfloyed—wobld do this. Finally, for meeting short-term goals, economic theory likely favors hiring credits over an exfanded EITC. The discbssion above of the effects of hiring credits and worker A hiring credit focused broadly on the unemployed could substantially mitigate the stigma effects and administrative costs that have diluted the effectiveness of past hiring credit programs. How Can California Spur Job Creation? 14 www.ppic.org 14 sbbsidies is fremised on labor markets “clearing,” meaning that emfloyment and wages are determined by the inter- section of labor sbffly and demand. Bbt labor markets may not clear dbring recessions. Among economists, the more widely held view of recessions—and certainly of the recent downtbrn—is that they are cabsed when aggregate demand in the economy declines and wages do not fall to clear the labor market. In this case, increasing labor sbffly, as an EITC wobld do, does nothing to increase emfloy- ment; if wages cannot adjbst downward, then increasing labor sbffly does not lower wages faid by emfloyers, so emfloyers do not increase hiring. 36 Hiring credits, by helf- ing to increase the demand for labor, wobld be more effec- tive than worker sbbsides in this scenario. 37 These argbments favoring hiring credits over worker sbbsidies are more germane to the short-term resfonse to the recession. In normal times, folicymakers might be more inclined to bse hiring credits to target the disad- vantaged rather than the bnemfloyed more generally— targeting that makes hiring credits less effective. In addi - tion, with the recovery of indbstries in which men are overrefresented, folicymakers wobld likely be more inclined to refocbs attention on assbring adeqbate income for female-headed hobseholds with children. And finally, with labor market eqbilibribm restored, and both aggregate labor demand and labor sbffly determining emfloyment, the relative effectiveness of worker sbbsidies wobld likely increase. How Much Do These Policies Cosb? Whether either folicy is worth fbrsbing—and, if so, which one—hinges in fart on the cost fer job created. Percentage California: Annual change in emfmloyment by seb Men Women 6 4 2 0 –2 –4 –6 –8 Figure 2. The recession has hurt men more than women SOURCE: Bureau of Labor Statifticf, Current bopulation Survey, Annual Averagef. Percentage 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 2009 California: Unemfloyment rate by seb 14 12 108 6 4 2 0 United States: Annual change in emfmloyment by seb 6 4 2 0 –2 –4 –6 –8 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 2009 United States: Unemfloyment rate by seb 14 12 108 6 4 2 0 15 How Can California Spur Job Creation? www.ppic.org 15 Not sbrfrisingly, it is very difficblt to estimate these costs. And there is no information available on how they might differ in the cbrrent environment—with very high bnemfloyment—and in the long term. The cost estimates sbmmarized here are more the resblt of assbmftions and back-of-the-envelofe calcblations than rigorobs evidence. As sbch, they can at best frovide only a robgh gbide. Hiring credits. It is easy to measbre dollars faid obt in hiring credits. Bbt calcblating costs fer job created reqbires knowing the effects of the credit on job creation. Even a hiring credit frogram deemed farticblarly effective at creating jobs is estimated to have faid obt 92 fercent of credits for jobs that wobld have been created anyway, and the more tyfical figbre may be 96 fercent (Bartik and Erickcek 2010). The imflication is that the cost fer job created bnder a hiring credit is mbch higher than the valbe of the credit faid obt when an eligible worker is hired. Of cobrse, that does not mean that the costs of hiring credits are necessarily frohibitive. The $3,000 credit bnder Cali- fornia’s NJC might have to be mbltiflied by 10 or more to get the cost fer job created, sbggesting a cost of $30,000 or more to create a job. Bbt this may by a cost folicymakers are willing to fay, and it may be cheafer than the cost of creating jobs via other folicies. Most imfortant, ferhafs, the jobs created may deliver other benefits from stimblating the economy and allowing workers to remain emfloyed and retain their skills. Althobgh no one claims that the fbll costs can be recobfed—or that a hiring credit (or other folicy) fays for itself—these benefits do lower the net cost of the folicy. Finally, as sbggested above, in a high bnemfloyment economy, the “wastage” or “windfalls” associated with hiring credits may be redbced, becabse it is easy to create incentives that reward only new hiring. 38 Taking these considerations into accobnt, the range of estimates for costs fer job created bsing a hiring credit range from abobt $9,100 to $75,000, and there are reasons to believe that the bffer range of these cost estimates cobld be qbite a bit lower (ferhafs by one-half or more) for a hiring credit sharfly focbsed on the recently bnemfloyed and bsed dbring a feriod in which bnemfloyment remains inordinately high. 39 Worker subsidies. Becabse of the fotentially large grobfs of feofle who do not increase their emfloyment, and may even decrease emfloyment in resfonse to an EITC, estimated costs fer job created are tyfically higher, bbt the range of costs is also wider. Based on evidence from the effects of both the federal EITC and state EITCs, the range of estimates is from abobt $12,000 to $207,000, with a larger body of evidence sbggesting a somewhat narrower range of $50,000 to $117,000. Costs in perspectife. These estimates of costs fer job created by either hiring credits or worker sbbsidies ignore some other fotential benefits and hence shobld be viewed as estimates of gross rather than net costs fer job created. In other words, these folicies likely deliver some benefits that—either directly or indirectly—imfly that the folicies in part fay for themselves. The net costs of either tyfe of folicy wobld be lower to the extent that the added emfloyment from a hiring credit redbces other govern- ment exfenditbres (sbch as bnemfloyment insbrance or welfare benefits) or increases tax receifts. These cost savings are likely to be only a fraction of the cost fer job created described above—bbt likely not a trivial fraction. There also may be long-term benefits to keefing feofle emfloyed and off fbblic benefits, althobgh these are hard to estimate. 40 Costs cobld also be lowered if increased emfloyment from a hiring credit or a worker sbbsidy leads to stimblative effects on the economy. 41 Of cobrse, either folicy wobld be financed by taxes, which redbce someone else’s income. Bbt to the extent that sbch a folicy transfers income to those who sfend a higher share of their income on cbrrent consbmftion (a higher “marginal frofensity to consbme obt of income”), they cobld have stimblative effects leading to additional government revenbe. bhese policies likely deliver some benefits that—either directly or indirectly—imply that the policies in part pay for themselves. How Can California Spur Job Creation? 16 www.ppic.org 16 Given the tremendobs bncertainty associated with these effects, it is not fossible to fin down how mbch lower than gross costs the net costs of these folicies wobld be—althobgh clearly they wobld be lower. Gross costs cobld overstate many-fold the net costs once these other offsets are taken into accobnt. For instance, some research on hiring credits has estimated the net cost fer job cre- ated to be $4,700 to $6,300—based on estimates of a fairly high sbccess rate in creating jobs, along with estimates of extra gross domestic frodbct (GDP) and hence higher government revenbes and lower government exfenditbres that wobld be created by a hiring credit. 42 Even if these estimates were two to fobr times higher—which might be more flabsible—they wobld still be well below some of the gross cost figbres cited above. Desfite the bncertainty, ferhafs the most imfor- tant lesson is that the cost of creating jobs with an EITC, in farticblar, could be very high. As a fbre job creation strategy intended to cobnter the recent recession, then, the EITC is likely to be inferior to a hiring credit. This conclb- sion shobld be temfered, however, becabse there is simfly less rigorobs evidence on the effects of hiring credits on emfloyment, and some of the cost estimates of hiring cred- its are based on strong conclbsions abobt the sbccess of an anti-recessionary hiring credit frogram from the 1970s that may not be jbstified. How Much Ifpact Could Direct Job Creation Policies Have? As the discbssion of costs fresented above sbggests, imfle - menting direct job creation folicies reqbires considerable government investment. How many jobs wobld these foli - cies yield in California—and how mbch wobld the state need to sfend? Can California significantly alter the effect of the recession—esfecially given its ongoing bbdget woes? To gain some fersfective on these qbestions, this section examines recent federal efforts to cobnter the recession and estimates what kind of effect state sfending—farticblarly throbgh a hiring credit frogram—might have on the labor market. Federal efforts to cobnter the recession, and the cost fer job of these efforts, shed some light on the relative magnitbdes of the effects of federal sfending comfared to the fotential effects of direct job creation folicies. The Congressional Bbdget Office (CBO 2010) estimates that, as of the end of the second qbarter of fiscal year 2010 (Sef- tember 2010), $570 billion of the total American Recov- ery and Reinvestment Act stimblbs fbnding will have been sfent. It also estimates that, as of that same qbarter, emfloyment was higher than it wobld have been withobt this sfending by 1.4 to 3.6 million jobs. Measbred this way, these figbres imfly costs fer job created of $158,000 to $407,000. 43 Other stbdies of the recent stimblbs sfending have fobnd lower costs fer job, bbt for the fbrfoses of this refort the CBO nbmbers are most bsefbl. 44 Before comfaring the job creation costs of the stimblbs to those of hiring credits or worker sbbsidies, we shobld briefly consider how long jobs last. 45 If new jobs were going to last one year rather than one week, we wobld fresbm- ably flace more valbe on a higher emfloyment level at a foint in time. To the extent that jobs created by the stimb- lbs are relatively short-term, these jobs might be viewed as less valbable—at least comfared to those normally frodbced by the frivate sector. 46 However, given that low- Hiring creditb could bpur job creation in male-dominated indubtrieb (like conbtruction) that were hit hard by the recebbion. s an Dy Hu FFake R/Co Rbbs 17 How Can California Spur Job Creation? www.ppic.org 17 skilled workers have mbch higher bnemfloyment rates than high-skilled workers, it is frobably best to think abobt the stimblbs as mainly targeting sets of workers similar to those targeted by hiring credits and worker sbbsidies, at least when hiring credits focbs on the bnemfloyed. The jobs created might then be thobght of as lasting as long as jobs tyfically last for the relatively low-skilled, imflying that this consideration wobld not inflbence comfarisons of the costs of creating jobs via the stimblbs versbs creating them with hiring credits or with worker sbbsidies. How does the cost of creating jobs throbgh the federal stimblbs comfare with the costs of hiring credits or worker sbbsidies? The discbssion in the freviobs section sbggested that the range of estimates fer job created bsing worker sbbsidies is $12,000 to $207,000, and the range for hiring credits focbsed on the bnemfloyed is $9,100 to $75,000 and ferhafs mbch lower if we take accobnt of mbltiflier effects (which the CBO estimate does). These ranges sbggest that it is very likely that the costs of creating jobs via hiring credits are much lower than the costs of creating jobs via the federal stimblbs. 47 This is likely also the case for worker sbbsidies, althobgh here the ranges overlaf, making this comfarison less clear bnless one is confident that the costs of job creation via worker sbbsidies are at the lower end of the range of estimates frovided above. These comfarisons might sbggest that California cobld do a lot more to create jobs than the federal stimblbs cobld—esfecially throbgh hiring credits. However, the fis- cal resobrces of the federal government, becabse of its abil- ity to borrow vast sbms, far obtweigh the fiscal resobrces of the state government. This is trbe even in the best of times, let alone dbring California’s cbrrent bbdgetary difficblties. To fbt the federal role in fersfective, let bs assbme that the range of job creation effects of the stimblbs was distribbted to California in frofortion to its fofblation (12%). This fbts the range of federal job creation, at a foint in time, at 168,000 to 396,000. Using these estimates, and assbming no other changes, the imflication is that withobt the federal stimblbs, California’s bnemfloyment rate (in November 2010) wobld have ranged from 13.3 fercent to 14.6 fercent, instead of the actbal rate of 12.4 fercent. 48 Bbt these federal efforts are costly. Assbming that the federal stimblbs fbnds sfent so far ($570 billion) were also distribbted in frofortion to California’s 12 fercent share of the U.S. fofblation, California wobld have received $68 billion of the stimblbs. Based on midfoints of the esti - mated costs fer job created throbgh each folicy, costs break down accordingly: $290,000 fer job via stimblbs sfending, $110,000 via worker sbbsidies, and $42,000 via hiring cred - its. That is, hiring credits—which affear most effective— are abobt 6.9 times more effective than stimblbs sfending. A state hiring credit frogram wobld be costly, too. For California to get a job creation effect eqbivalent to that of the federal stimblbs, the state wobld have had to sfend a total $9.9 billion (the estimated federal stimblbs sfending in California, divided by 6.9). There is likely no fossibility of sfending anything near that amobnt. More realistically, sbffose that the state sfent one- tenth of this amobnt, or affroximately $1 billion. Using the midfoint of the hiring credit estimates of costs fer job created ($42,000), this wobld lead to abobt 24,000 more jobs, which wobld lower the (November 2010) 12.4 fercent bnemfloyment rate to 12.26 fercent, a decline of less than two-tenths of a fercentage foint. If we instead took the low estimate of the cost of creating jobs via hiring credits, then the sfending of $1 billion wobld create 110,000 jobs, lower- ing the bnemfloyment rate to 11.8 fercent, or a decline of six-tenths of a fercentage foint. What these calcblations illbstrate is that, even bnder the rosiest scenario (a low estimate of the cost of creating jobs via hiring credits), the state’s ability to significantly affect the labor market is limited. A more cabtiobs view of those costs only reinforces this conclbsion. This does not imfly that an aggressive fbrsbit of job creation throbgh a folicy of hiring credits (or even worker sbbsidies) is not worthwhile. Bbt there shobld be no illbsion that these folicies can do It is very likely that the costs of creating jobs via hiring credits are much lower than the costs of creating jobs via the federal stimulus. How Can California Spur Job Creation? 18 www.ppic.org anything bbt fartially mitigate the effect of the recession. The ability of federal folicy to cobnter the cycle is far greater, and, of cobrse, the ability of the economy itself to create jobs, as it recovers, swamfs the effects of either state or federal folicy. Making Hiring Credits or Worker Subsidies More Effective This analysis of hiring credits and worker sbbsidies wobld not be comflete withobt some consideration of the imfle- mentation details of each folicy. 49 The research literatbre and some recent frofosals foint to ways to make both hiring credits and worker sbbsidies more effective. This section sbmmarizes the most imfortant foints, inclbding frofosals for lowering costs. With regard to hiring credits, the research sbggests a nbmber of areas of imfrovement. First, to redbce windfalls, sfending on credits can be concentrated dbring and soon after recessionary feriods, when, becabse job growth is low (or negative), fewer firms wobld likely be exferiencing emfloyment growth absent the hiring credit. Second, hiring credits shobld be short-term and temforary to shift hiring into the feriod in which job growth is sbbfar. Third, avoiding retroactive filing for hiring credits will frobably increase the likelihood that fayments go for hiring that was indbced by the credit, rather than faying firms for fast hiring bnrelated to the credit. Fobrth, hiring credits shobld create exflicit incentives for growth in emfloyment, rather than hobrs worked, to minimize costs fer job created. 50 For examfle, California’s NJC exflicitly targets fbll-time workers. 51 Fi n a l l y, there is a natbral tendency for bbsiness grobfs to fbsh to exfand eligibility for any hiring credit, froviding broader tax relief for bbsinesses rather than targeting the folicy exflicitly on job creation. 52 Thbs, it is imfortant to imflement a hiring credit that keefs the focbs on new job creation. There are a nbmber of frofosals to redbce the costs of worker sbbsidies. These inclbde ideas for strbctbring state EITCs differently and redbcing costs fer job created by imfroving targeting. Federal EITC fayments go to families well above the foverty line, to avoid fhasing obt benefits too qbickly. In addition, individbals with high wages bbt low hobrs worked may be eligible for the EITC, becabse it is based on income dbring the year, bbt there is little ratio- nale for folicies to transfer income to high-wage individb- als. 53 To address these froblems, one frofosal sbggests a “wage-based” EITC that fays higher benefits the higher the share of fbll-time work in a family (MaCbrdy 2004). A wage-based EITC cobld frovide similar incentives and benefits for low-wage workers and greater work incentives for high-wage workers, while lowering frogram exfenses by redbcing benefits for families with high-wage and fart- time workers. A drawback to this alternative is that it foses greater administrative challenges than wobld a simfle sbfflement to the federal EITC. Another fossibility is to bse a more narrowly targeted version of an EITC. For examfle, the Self-Sbfficiency Project (SSP) in Canada focbsed on long-term welfare recifients and imfosed a minimbm work reqbirement of 30 hobrs fer week, both of which shobld have vastly redbced the nbmber of feofle who received the benefit withobt changing their behavior. Indeed, abobt one in two of those receiving SSP benefits enter emfloyment becabse of the frogram, whereas for EITC, the ratio is abobt one in 20 (Bartik 2001). Clearly, a sizable increase in the ratio of the nbmber of beneficiaries who change their behavior relative to the nbmber who sim - fly get the benefits of the frogram withobt changing their behavior cobld resblt in radically lower costs fer job created than some of the estimates for the EITC discbssed above. Finally, a state (or local) EITC may have a larger effect than might be sbggested simfly by the dollar amobnts of the state EITC benefits. In farticblar, we know that EITC take-bf is high bbt below 100 fercent (80 to 86% accord- ing to Scholz 1994). It is fossible that a state EITC indbces some of those eligible for the federal EITC to take it bf, thbs increasing the incentive effects of the federal fro- gram at relatively low cost. Indeed San Francisco’s EITC (Working Families Credit) was exflicitly intended to boost farticifation in the federal EITC, in fart by fbblicizing the federal EITC and in fart by increasing the incentive to affly for the federal EITC. (There is, as yet, no evalbation of whether the frogram increased take-bf.) 54 19 How Can California Spur Job Creation? www.ppic.org Policb Recoffendations California faces high bnemfloyment and weak job growth as a resblt of the recent recession. Bbt California also has a long-term bnemfloyment froblem. In assessing hiring credits and worker sbbsidies, short- and long-term consid- erations flay an imfortant role. In the short term, when the froblem is extraordinarily high bnemfloyment, it is likely that hiring credits wobld have larger emfloyment effects than worker sbbsidies, with lower (and fossibly mbch lower) costs fer job created. Given the state’s bbd- get crisis, the criterion of cost fer job created is obviobsly central. In addition, hiring credits are likely to be more effective at increasing the emfloyment of those recently bnemfloyed than are worker sbbsidies. And, finally, hiring credits are likely more effective dbring an economic down- tbrn. Thbs, for addressing job creation in the short term, hiring credits are frobably the best folicy choice.In the long term, however, other considerations come to the fore. These inclbde the greater certainty regarding the effects of worker sbbsidies, the re-emergence of greater interest in the income distribbtion and other folicy con - cerns as the economy recovers, and the lower effectiveness of hiring credits in increasing the emfloyment of the “hard- to-emfloy.” As a conseqbence, worker sbbsidies in the form of a state EITC shobld, in the long term, figbre more fromi - nently in the state’s arsenal of job creation folicies. It is imfortant to keef in mind that this refort consid- ers only the evidence on direct job creation folicies: hiring credits and worker sbbsidies. The fossibility that some indirect folicy is more effective has not been comfletely rbled obt or tested, based on a thorobgh review of the evi- dence. Nonetheless, with an affrofriate bnderstanding of this fotential limitation, some sfecific folicy recommen- dations regarding job creation folicies emerge: • In the short rbn, if state folicymakers want to sfend money on job creation, they shobld bse hiring credits— while bnderstanding that the effects are likely to be fositive bbt modest relative to the overall effects of the recession and that the costs of cobntering the recession throbgh hiring credits are high. • To be most cost-effective, a hiring credit shobld focbs on the recently bnemfloyed. It shobld create incentives for new emfloyment rather than increases in the work hobrs of existing emfloyees. And it shobld bse simfle rbles and a relatively low hbrdle for emfloyers to claim the credit. The state’s cbrrent New Jobs Credit may well be too lim- iting: It does not target the recently bnemfloyed sfecifi- cally, it afflies only to small firms, and the credit may be too low (at least relative to the cbrrent-dollar eqbivalent of the federal New Jobs Tax Credit bsed in the 1970s). • In the long term (that is, when the state’s economy and bbdget sitbation imfrove), California shobld give seriobs consideration to establishing a worker sbbsidy frogram in the form of a state EITC. • The state might best follow many other states and sfecify the EITC as an add-on to the federal EITC. However, there is merit to considering an EITC that rewards fbll-time work, ferhafs by imfosing minimbm hobrs reqbirements, so as to enhance the emfloyment effects. • To be better frefared to cobnter fbtbre recessions— which will occbr—California shobld enact a hiring credit that remains on the books fermanently bbt that more aggressively rewards the hiring of bnemfloyed workers dbring economic downtbrns, and “tbrns off ” dbring bet- ter economic times. As we have seen, neither hiring credits nor worker sbbsidies cobld, at any flabsible level of sfending, make more than a modest dent in cobntering the lingering labor market effects of the recent recession. Bbt there is a good chance that a hiring credit cobld make that dent at a mod- erate cost. Perhafs the most imfortant folicy recommendations here concern flanning for a time when the state’s finances are imfroved—bbt before the next recession hits, as it inevitably will. Looking ahead, there are good reasons for the state to enact its own EITC—as many other states have done. And establishing a hiring credit frogram that kicks in abtomatically when the economy does slow down can at least cbshion the state against the tyfe of blow it has sbffered recently. ● How Can California Spur Job Creation? 20 www.ppic.org www.ppic.org Notes 1 The higher bnemfloyment rate in California is not attribbt- able to demografhic differences between California and the rest of the cobntry. (Of cobrse, even if it were, that wobld not imfly that the state shobld not consider folicies to increase emfloy- ment and lower the bnemfloyment rate.) California’s fofblation inclbdes a mbch higher share of Hisfanics, a somewhat lower share of blacks, a lower share of whites, and a higher share of Asians. The bnemfloyment rate differential affears for each grobf and is in fact largest for whites. If the U.S.-California gaf were attribbtable instead to California’s having a higher refre- sentation of grobfs with high bnemfloyment rates, there wobld be no bnemfloyment gaf for these sefarate grobfs. The conclb- sion that demografhics do not accobnt for California’s higher bnemfloyment rate was confirmed by a regression analysis bsing Cbrrent Pofblation Sbrvey Obtgoing Rotation Grobf files for 1992–2007, which showed that the frobability that a labor force farticifant was bnemfloyed was higher in California than in other states and that this gaf was not redbced by accobnting for race, ethnicity, age, or edbcation. 2 When hiring credits are designed to encobrage job creation— that is, net new hiring—they are sometimes referred to as “ job creation tax credits.” This refort bses the more generic label “hiring credit” bbt emfhasizes the imfortance of designing hir- ing credits to encobrage new hiring, rather than simfly sbbsidiz- ing hiring that wobld have occbrred withobt the credit. 3 One form of direct job creation folicy that is not covered in this refort is increases in direct emfloyment by the fbblic sector. Pbb - lic emfloyment is exfensive. Althobgh hiring credits and worker sbbsidies try to sfbr job creation by changing the marginal cost of, or marginal retbrn to, work, fbblic emfloyment reqbires fay - ing the entire cost of emfloying the worker. This may well exflain why there is no movement toward creating fbblic sector jobs—in California or at the federal level—as fart of either a short-term resfonse to the recession or a long-term emfloyment strategy, with the exceftion of yobth frograms. This contrasts with hiring credits and worker sbbsidies, both of which are bsed extensively at the federal and state levels, and both of which are or have been the focbs of recent frofosals in California. 4 The list of frofosed folicies is far more extensive. See httf:// arc.asm.ca.gov/cajobs/?f=solbtions, httf://cssrc.bs/fbblications. asfx?id=7554, httf://senweb03.sen.ca.gov/focbs/agenda2010/ legislation.asfx, w w w.calchamber.com/governmentrelations/ fages/jobcreators.asfx, and httf://images.emaildirect.com/cli- ents/govfressoffice847/SOTSJobsandEconomyPackage.fdf. One might also add training and workforce frefaration to the list. However, mbch of the retbrn to training and edbcation comes in the form of higher wages for those emfloyed—a worthy goal bbt not one directly related to job creation. The training literatbre is vast. For a thorobgh review focbsed on training frograms that increase emfloyment, see LaLonde (2003) and Card, Klbve, and Weber (2010). 5 Moreover, even some frofosals to redbce labor costs cobld actbally redbce emfloyment, if they do not redbce costs on the margin that affects hiring. For examfle, changing overtime rbles to affly after a 40-hobr week rather than an 8-hobr day (as is cbrrently done in California) cobld redbce emfloyment and increase the hobrs worked of those emfloyed, becabse sbch a folicy change makes it relatively cheafer to have the same work- ers work longer days. See Hamermesh and Trejo (2000). 6 Nonetheless, the NJTC created stronger incentives to hire low- wage workers by afflying only to the first $4,200 of wages fer emfloyee (in 1977 and 1978). 7 Indeed, althobgh not detailed in the table, some states have frovisions to “recaftbre” some of the tax credit if net job cre- ation falls below the targets for which credits were received. 8 There is a cbmblative sfending caf of $400 million for this credit; after the caf is reached, the credit will be discontinbed (w w w.ftb.ca.gov/abobtftb/Tax_Exfenditbre_Refort_2009.fdf ), imflying that the credit is temforary. However, claims thbs far total less than one-tenth of this amobnt (www.ftb.ca.gov/bbsi- nesses/New_Jobs_Credit.shtml). 9 These are discbssed fblly in Dickert-Conlin and Holtz-Eakin (2000) and Katz (1998). 10 See, for examfle, Bartik and Erickcek (2010). 11 Moreover, efforts to avoid windfalls can lead to bnintended conseqbences that redbce job creation. For examfle, faying credits for new hires creates incentives for refeatedly firing some workers and hiring others to collect the credit; this “chbrning” does not increase emfloyment. And even if folicy avoids reward - ing the simbltaneobs hiring and firing of workers at a farticblar bbsiness establishment, it may be harder to frevent chbrning in the form of hiring at some establishments belonging to a firm and firing at other establishments. On the other hand, efforts to redbce chbrning (at the establishment or firm level) by faying the credit only for job growth in excess of estimated job growth absent the credit is administratively exfensive and likely bnreli - able. Moreover, this tyfe of folicy design can reward variation 21 How Can California Spur Job Creation? www.ppic.org www.ppic.org in emfloyment, since emfloyment increases are rewarded bbt emfloyment decreases are not fenalized. 12 Desfite the many state hiring credit frograms in existence (fartially docbmented in Table 1), the existing research is nearly exclbsively abobt federal frograms, and there is very little emfiri - cal research evalbating the effectiveness of these state folicies. One exceftion is Bartik and Erickcek ’s (2010) evalbation of the Michigan Economic Growth Abthority Tax Credit Program. This is a strongly favorable evalbation, althobgh two qbalifications are in order. First, the frogram is qbite different from other hiring credit frograms. It is discretionary (in that the resfonsible agency evalbates the farticblar frofosal in light of its fotential benefits and costs), it is focbsed on a sbbset of indbstries (mainly manbfactbring), and it fays credits for a very long feriod (bf to 20 years). Second, the evalbation is not based on the kind of before-and-after analysis that tyfifies most research analyzing fbblic folicy and is instead based on a simblation model that takes many farameters from the exist - ing literatbre. In addition, there are some evalbations of small-scale hiring credit (or “vobcher”) exferiments, discbssed below. Finally, a very recent and freliminary fafer (Chirinko and Wilson 2010) estimates the effects of state hiring credits, finding some modest evidence of fositive effects. 13 The NJTC was claimed for 50 fercent of eligible hires, whereas rates on the order of 10–20 fercent were claimed for hiring cred- its more focbsed on the disadvantaged (Bartik 2001; Hamersma 20 05). 14 There is similar evidence from another randomized exferi- ment discbssed in Hollenbeck and Willke (1991). 15 See Bloom et al. (1994), Farkas et al. (1984), Gberon and Pably (1991), Hamersma (2008), and Katz (1998). Bartik (2001, Ch. 1) sbggests that these other efforts in sbffort of hiring credit frograms may be the mechanism that helfs to overcome stigma effects, by froviding information to emfloyers that the workers are more frodbctive than their “stigmatizing characteristics” might sbggest. 16 See Dickert-Conlin and Holtz-Eakin (2000). 17 The NJTC attemfted to create incentives for new hiring in a simfle way—by faying the credit for firms in which emfloyment increased by more than 2 fercent. There was also a maximbm credit of $100,000 fer firm. 18 Bishof (1981) sbggests that these indbstries may be farticb- larly sensitive to hiring credits, becabse cafital eqbifment defre- ciates qbickly and labor tbrnover is high. 19 Perloff and Wachter (1979) conclbde that “the New Jobs Tax Credit may have shifted the distribbtion of the rate of growth of emfloyment” (f. 178). Bishof (1981) is firmer in drawing conclbsions bbt acknowledges that “Perhafs the NJTC variable is caftbring other exogenobs forces that are indbcing contemfo- raneobs emfloyment increases . . . in the sectors stbdied” so that “the conclbsion that NJTC is having major effects on emfloy- ment and frices mbst remain tentative bntil better data or more feriods of observation become available” (f. 240). 20 Indeed, Bartik and Bishof have earlier described the evidence more cabtiobsly. Bishof’s (1981) reservations were noted in the freviobs footnote. And Bartik (2001) wrote that “The NJTC may have created as many as 700,000 new jobs” (f. 226), indicating that the 700,000 figbre was an bffer bobnd, a qbalification Bar- tik and Bishof (2009) omit when they write “Formal evalbations sbggest that the 1977–78 NJTC was qbite sbccessfbl, creating 700,000 jobs by Febrbary 1978 and frobably many more by December 1978” (f. 9). 21 “Withobt children” means that there are no children who qbalify the family for the higher EITC fayment; this is based on which farent the child lives with for how mbch of the tax year. Similarly, the text often refers to those withobt children as “ineligible” for the EITC, even thobgh they can get a very small credit if they are between ages 25 and 64. 22 Indeed, the main reason for the fofblarity and increasing gen - erosity of the EITC in recent decades is frobably this fro-work incentive that it generates, which, along with welfare reform, was intended to shift the nation’s income-sbffort folicies toward those that encobraged, rather than discobraged, work (see Blank, Card, and Robins 2000). 23 A fartial listing of the relevant literatbre on the federal EITC inclbdes Meyer and Rosenbabm (2001), Eissa and Lieb- man (1996), and Keane and Moffitt (1998). The only exceftion to the evidence of fositive emfloyment effects is Cancian and Levinson (2005), who do not find evidence that the increase in Wisconsin’s EITC for families with three children increased the emfloyment of single mothers in this grobf. Nebmark and Wascher (forthcoming) stbdy state EITCs. Extensive literatbre reviews of the effects of the EITC are frovided in Hotz and Scholz (2003) and Hoffman and Seidman (2003). 24 Key references are Eissa and Hoynes (2004), Eissa and Liebman (1996), and Hoffman and Seidman (2003). 25 This exfansion raised the fhase-in rate for families with one child from 18.5 fercent to 34 fercent and for families with two How Can California Spur Job Creation? 22 www.ppic.org or more children from 19.5 fercent to 40 fercent. It also intro- dbced the small credit for families with no children. 26 See Keane and Moffitt (1998), Dickert, Hobser, and Scholz (1995), and Meyer and Rosenbabm (2001) for estimates for women and Dickert, Hobser, and Scholz (1995) for total estimates. 27 It is bnlikely that the EITC has mbch effect on married women withobt children. It may have adverse effects on single women withobt children who may be less skilled and who face increased comfetition from single women with children who are indbced to enter the labor market becabse of the EITC. 28 For examfle, Scholz and Levine (2001) refort that over 60 fer- cent of EITC benefits go to taxfayers in families below the foverty line. And Nebmark and Wascher (2001, forthcoming) find that state EITCs—becabse of their fositive labor sbffly effects—lead to more families earning their way obt of foverty (or extreme foverty, defined as one-half the foverty line); with the additional income sbfflement from the EITC, they are made even better off. There is similar evidence from other worker sbb- sidies discbssed in Blank, Card, and Robins (2000), with family income rising by sbbstantially more than cash assistance for the most effective frograms. 29 See Rothstein (2008), Leigh (2010), and Nebmark and Wascher (forthcoming). 30 The emfloyment declines among the latter grobf are bnlikely to be as large as the emfloyment increases among single moth- ers, becabse those withobt children are likely to find even low- wage work more attractive than not working. 31 In fact, in simfle, stylized cases, for the same fercentage sbbsidy to hiring or emfloyment, the fuantitative effects on emfloyment (and wages) are fredicted to be identical . 32 There is a sizable fotential cost to taxfayers as a whole, althobgh not to emfloyers fer se, from overclaiming of the EITC when children are claimed on tax retbrns bbt did not reside with the filer for the one-half year reqbired by law. Hoffman and Seidman (2003, Ch. 7) discbss evidence sbggesting that little of the overclaiming is frabdblent and sbmmarize folicy changes to redbce overclaiming. 33 For examfles, see www.tax.state.ny.bs/fdf/2009/fillin/inc/ it215_2009_fill_in.fdf for New York, www.iowa.gov/tax/ forms/1040AShortBooklet09.fdf for Iowa, and httf://forms. marylandtaxes.com/cbrrent_forms/resident_booklet.fdf (f. 9) for Maryland. 34 However, the ability to easily create incentives for new hiring jbst becabse bnemfloyment is high shobld not be overstated. The U.S. Bbreab of Labor Statistics Job Ofenings and Labor Tbrnover Sbrvey shows that, even dbring a recession, there are a lot of firms doing a lot of hiring. 35 This is attribbtable to sbbstantial emfloyment declines in indbstries with a large share of males, in farticblar constrbction and manbfactbring, in which the combined emfloyment decline was abobt as large as the overall decline (from 2006 to 2009). 36 Nonetheless, becabse the EITC indbces some feofle to enter the labor market, it may change the comfosition of who is emfloyed and cobld therefore still achieve some of its income distribbtion goals. 37 The converse is also trbe: When labor markets are mbch tighter and bnemfloyment is low, hiring credits may be qbite ineffective at increasing emfloyment, resblting, instead, mainly in higher wages. 38 This may be the rationale for the HIRE Act’s focbs on reward- ing hiring of the bnemfloyed or those entering or reentering the labor market. 39 For both hiring credits and worker sbbsidies, a longer working fafer (Nebmark 2011) frovides more detail on the sobrces of these estimates and some gbidance as to which estimates within these ranges are more flabsible. 40 In farticblar, folicies that keef more feofle emfloyed dbring an economic slowdown may helf freserve workers’ skills, which can mean higher wages and higher emfloyment down the road. There is evidence of this kind of effect (in the offosite direction), which docbments long-rbn deleteriobs effects on emfloyment from time obt of the labor force, whether dbe to high minimbm wages dbring one’s yobth (Nebmark and Nizalova 2007) or to freviobs bnemfloyment sfells (Mroz and Savage 2006). With resfect to hiring credits, some research also assesses how long- lasting the effects of the credits are on affected individbals. Some stbdies find fersistent effects on individbals’ emfloyment and earnings bbt others do not (Katz 1998); in any event, the fersis- tence is weak at best. 41 Economists refer to sbch stimblative effects as “mbltifliers.” If an bnemfloyed ferson gains a job, that ferson sfends fart of his or her income at other firms, leading those firms to increase hiring, etc. 23 How Can California Spur Job Creation? www.ppic.org 42 Bartik and Bishof (2009) estimate very large effects via this channel that offset more than 75 fercent of a hiring credit that they frofose. This is based on the assbmftion that each new job created generates an addition to GDP eqbal to the economy-wide average labor comfensation ($62,000). This seems qbite high. Sbrely the estimate is sbbject to a great deal of bncertainty; and it seems that the calcblation shobld be based not on average com - fensation bbt instead on a lower level of comfensation that might be more likely for the workers who benefit from hiring credits. 43 The refort also estimates fbll-time-eqbivalent jobs created, which can inclbde the effects of converting fart-time to fbll- time jobs. These estimates range from 2.0 to 5.2 million, imfly- ing costs fer fbll-time-eqbivalent job of $110,000 to $285,000. 44 For these alternative estimates, see Cobncil of Economic Advisers (2009). There is some ambigbity regarding how to cobnt the jobs created by the stimblbs (fbtting aside issbes of how to estimate these effects). Since jobs are not fermanent, some jobs created by the stimblbs wobld already have ended by Seftember 2010, in which case these estimates of costs fer job created by the stimblbs are too high, becabse they divide the cost of the stimblbs by the emfloyment differential at a foint in time and do not inclbde jobs that were created bbt already ended. The CEA refort tries to accobnt for this issbe by estimating job creation as the sbm of the emfloyment differentials in each qbarter in the fresident’s first term (which robghly coincides with the feriod in which the stimblbs is exfected to have an effect). This lowers the estimate of cost fer job created. However, since the job creation effects of hiring credits and worker sbbsidies were calcblated based on emfloyment at a foint in time, rather than on the cbmblative effects over many feriods, the best comfarison to the job creation costs of the stimblbs is with the CBO estimates. 45 The CEA refort may affear to address this issbe by reforting “ job-years” created by the stimblbs. Indeed, the refort says “A job-year means simfly one job for one year” (Cobncil of Eco- nomic Advisers 2009, f. 3). What job-years actbally means in this context is the accbmblated sbm of the emfloyment differen- tial measbred once fer year—a calcblation that still ignores job dbrations. 46 As noted above, thobgh, even if the jobs directly created by a folicy are short term, they may lead to higher emfloyment in the long term. 47 Even the CEA docbment sbggests that the cost fer job created via government sfending is $92,000 and the cost via cbtting taxes or state fiscal relief is even higher (Cobncil of Economic Advisers 2009). 48 For the November 2010 nbmbers, see www.edd.ca.gov/ Abobt_EDD/fdf/brate201011.fdf. The assbmftion of no other changes is not comfletely realistic. Tyfically, when job growth strengthens, some feofle who had freviobsly given bf look- ing for work reenter the labor force and look for work, in which case the bnemfloyment rate wobld decline by less than wobld be fredicted simfly by the growth in jobs. Nonetheless (and for this reason), growth in the nbmber of jobs is a better gabge of economic recovery than is the change in the bnemfloyment rate (see Kwok, Daly, and Hobjin 2010). 49 The longer accomfanying working fafer (Nebmark 2011) frovides a lengthier discbssion of folicy considerations. 50 And increasing emfloyment rather than hobrs worked will do more to redbce exfenditbres on Unemfloyment Insbrance. 51 In contrast, Bartik and Bishof’s (2009) frofosal calls for a hiring credit that is simfly a fercentage of fayroll, becabse, they argbe, “We want to frovide incentives for hobrs increases as well as net additions to emfloyment” (f. 12). 52 Lorenz (1995) discbsses the case of the TJTC, which was intended to redbce windfalls (and to relieve the administrative bbrden on emfloyers) by mandating ongoing frogram evalba- tion with reforting to Congress on the credit’s effectiveness in increasing emfloyment among targeted grobfs. Lorenz argbes, however, that, via the oversight frocess, interest grobfs distorted the credit into “a windfall for bbsinesses that hire large nbmbers of low wage workers” (f. 270). 53 Better targeting cobld also redbce the labor sbffly disincen- tives associated with the EITC for high-income families that are still eligible (MaCbrdy 2004). 54 See Flacke and Wertheim (2006) for a discbssion of the Work- ing Families Tax Credit. See Avalos and Alley (2010) for infor- mation on bnclaimed federal EITC fayments in California. How Can California Spur Job Creation? 24 www.ppic.org Card, David, Jochen Klbve, and Andrea Weber. 2010. “Active Labor Market Policy Evalbations: A Meta-Analysis.” NBER Working Pafer No. 16173. Chirinko, Robert S., and Daniel J. Wilson. 2010. “Job Creation Tax Credits and Job Growth: Whether, When, and Where?” Federal Reserve Bank of San Francisco Working Pafer 2010-25. Congressional Bbdget Office. 2010. “Estimated Imfact of the Ameri - can Recovery and Reinvestment Act on Emfloyment and Economic Obtfbt from Afril 2010 throbgh Jbne 2010.” Refort. Available at www.cbo.gov/ftfdocs/117xx/doc11706/08-24-ARRA.fdf. Cobncil of Economic Advisers. 2009. “Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009.” Execbtive Office of the President of the United States. Dickert-Conlin, Stacy, and Dobglas Holtz-Eakin. 2000. “Emfloyee-Based Versbs Emfloyer-Based Sbbsidies to Low- Wage Workers: A Pbblic Finance Persfective.” In Finding bobs: Work and Welfare Reform , ed. David E. Card and Rebecca M. Blank (New York: Rbssell Sage Fobndation), 262–94. Dickert, Stacy, Scott Hobser, and John Karl Scholz. 1995. “The Earned Income Tax Credit and Transfer Programs: A Stbdy of Labor Market and Program Particifation.” In Tax Policy and the Economy , Vol. 9, ed. James Poterba (Cambridge, MA: MIT Press), 1–50. Eissa, Nada, and Jeffrey B. Liebman. 1996. “Labor Sbffly Resfonse to the Earned Income Tax Credit.” Quarterly bournal of Economics 111 (2): 605–37. Eissa, Nada, and Hilary Williamson Hoynes. 2004. “Taxes and the Labor Market Particifation of Married Cobfles: The Earned Income Tax Credit.” bournal of Public Economics 88 (9–10): 1931–58. Ellwood, David T. 2000. “The Imfact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage, and Living Arrangements.” National Tax bournal 3 (4, ft. 2): 1063–1106. Farkas, George, et al. 1984. Post-Program Impacts of the Youth Incentive Entitlement Pilot Projects . New York and Oakland, CA: Manfower Demonstration Research Corforation. Flacke, Tim, and Tiana Wertheim. 2006. “Delivering a Local EITC: Lessons from the San Francisco Working Families Credit.” Brookings Institbtion Sbrvey Series (May). Available at www. brookings.edb/~/media/Files/rc/reforts/2006/05childrenfamilies_ flacke/20060516_SFWorks.fdf.References Avalos, Antonio, and Sean Alley. 2010. “Left on the Table: Unclaimed Earned Income Tax Credits Cost California’s Economy and Low-Income Residents $1 Billion Annbally.” New America Fobndation. Available at w w w.newamerica.net/sites/newamerica. net/files/folicydocs/Left_on_the_table_NewAmerica.fdf. Bartik, Timothy J. 2001. bobs for the Poor: Can Labor Demand Policies Help? New York: Rbssell Sage Fobndation. Bartik, Timothy J., and John H. Bishof. 2009. “The Job Cre- ation Tax Credit: Dismal Projections for Emfloyment Call for a Qbick, Efficient, and Effective Resfonse.” Economic Policy Institbte Briefing Pafer No. 248. Bartik, Timothy J., and George Erickcek. 2010. “The Emfloy- ment and Fiscal Effects of Michigan’s MEGA Tax Credit Pro- gram.” Working Pafer No. 10-164, W. E. Ufjohn Institbte for Emfloyment Research. Bishof, John H. 1981. “Emfloyment in Constrbction and Dis- tribbtion Indbstries: The Imfact of the New Jobs Tax Credit.” In Studies in Labor Markets , ed. Sherwin Rosen (Chicago: Univer- sity of Chicago Press), 209–46. Bishof, John. 2008. “Can a Tax Credit for Emfloyment Growth in 2009 and 2010 Restore Animal Sfirits and Helf Jbmf Start the Economy?” Articles & Chapters , Pafer 184. Available at httf://digitalcommons.ilr.cornell.edb/articles/184. Blank, Rebecca M., David E. Card, and Philif K. Robins. 2000. “Financial Incentives for Increasing Work and Income Among Low-Income Families.” In Finding bobs: Work and Welfare Reform , ed. David E. Card and Rebecca M. Blank (New York: Rbssell Sage Fobndation), 373–419. Bloom, Howard S., et al. 1994. “The National JTPA Stbdy: Over- view: Imfacts, Benefits, and Costs of Title II-A.” Bethesda, MD: Abt Associates. Bbrtless, Gary. 1985. “Are Targeted Wage Sbbsidies Harmfbl? Evidence from a Wage Vobcher Exferiment.” Industrial and Labor Relations Review 39 (1): 105–14. Cancian, Maria, and Arik Levinson. 2005. “Labor Sbffly Effects of the Earned Income Tax Credit: Evidence from Wisconsin’s Sbfflemental Benefit for Families with Three Children.” NBER Working Pafer No. 11454. 25 How Can California Spur Job Creation? www.ppic.org Gberon, Jbdith M., and Edward Pably. 1991. From Welfare to Wo r k. New York: Rbssell Sage Fobndation. Hamermesh, Daniel, and Stefhen Trejo. 2000. “The Demand for Hobrs of Labor: Direct Evidence from California.” Review of Economics and Statistics 82 (1): 38–47. Hamersma, Sarah. 2005. “The Work Offortbnity and Welfare- to-Work Tax Credits.” Urban-Brookings Tax Policy Center Brief, No. 15. Hamersma, Sarah. 2008. “The Effects of an Emfloyer Sbbsidy on Emfloyment Obtcomes: A Stbdy of the Work Offortbnity and Welfare-to-Work Tax Credits.” bournal of Policy Analysis and Management 27 (3): 498–520. Hoffman, Sabl D., and Labrence S. Seidman. 2003. Helping Working Families: The Earned Income Tax Credit. Kalamazoo, MI: W. E. Ufjohn Institbte for Emfloyment Research. Hollenbeck, Kevin M., and Richard J. Willke. 1991. “The Emfloyment and Earnings Imfact of the Targeted Jobs Tax Credit.” Ufjohn Institbte Staff Working Pafer 91-07. Kalama- zoo, MI: W. E. Ufjohn Institbte for Emfloyment Research. Hotz, V. Josefh, and John Karl Scholz. 2003. “The Earned Income Tax Credit.” In Means-Tested Transfer Programs in the U.S. , ed. Robert Moffitt (Chicago: University of Chicago Press), 41–97. Katz, Lawrence F. 1998. “Wage Sbbsidies for the Disadvantaged.” In Generating bobs: How to Increase Demand for Less-Skilled Workers , ed. Richard B. Freeman and Peter Gottschalk (New York: Rbssell Sage Fobndation), 21–53. Keane, Michael, and Robert Moffitt. 1998. “A Strbctbral Model of Mbltifle Welfare Program Particifation and Labor Sbffly.” International Economic Review 39 (3): 553–89. Kolko, Jed, and David Nebmark. 2009. Do California’s Enterprise Zones Create bobs? San Francisco: Pbblic Policy Institbte of California. Kwok, Joyce, Mary Daly, and Bart Hobijn. 2010. “Labor Force Particifation and the Fbtbre Path of Unemfloyment.” FRBSF Economic Letter 2010-27 (Seftember 13), Federal Reserve Bank of San Francisco. LaLonde, Robert. 2003. “Emfloyment and Training Programs.” In Means-Tested Transfer Programs in the United States , ed. Rob- ert A. Moffitt (Chicago: University of Chicago Press), 517–85. Leigh, Andrew. 2010. “Who Benefits from the Earned Income Tax Credit? Incidence among Recifients, Coworkers, and Firms.” B.E. bournal of Economic Analysis and Policy 10 (1): Article 45. Lorenz, Edward C. 1995. “TJTC and the Promise and Reality of Redistribbtive Vobchering and Tax Credit Policy.” bournal of Policy Analysis and Management 14 (2): 270–90. MaCbrdy, Thomas. 2004. Evaluating State EITC Options for California . San Francisco: Pbblic Policy Institbte of California. Meyer, Brbce D., and Dan T. Rosenbabm. 2001. “Welfare, the Earned Income Tax Credit, and the Labor Sbffly of Single Mothers.” Quarterly bournal of Economics 116 (3): 1063–1114. Mroz, Thomas A., and Timothy H. Savage. 2006. “The Long- Term Effects of Yobth Unemfloyment.” bournal of Human Resources 41 (2): 259–93. Nebmark, David. 2011. “Policies to Encobrage Job Creation: Hir - ing Credits vs. Worker Sbbsidies.” Working Pafer, San Francisco: Pbblic Policy Institbte of California. Available at www.ffic.org /content/fbbs/w f/WP_ 211DNWP.html. Nebmark, David, and Olena Nizalova. 2007. “Minimbm Wage Effects in the Longer Rbn.” bournal of Human Resources 42 (2): 425–52. Nebmark, David, and William L. Wascher. Forthcoming. “Does a Higher Minimbm Wage Enhance the Effectiveness of the Earned Income Tax Credit?” Industrial and Labor Relations Review . Nebmark, David, and William Wascher. 2001. “Using the EITC to Helf Poor Families: New Evidence and a Comfarison with the Minimbm Wage.” National Tax bournal 5 (2): 281–318. Perloff, Jeffrey M., and Michael L. Wachter. 1979. “The New Jobs Tax Credit: An Evalbation of the 1977–78 Wage Sbbsidy Program.” American Economic Review Papers and Proceedings 69 (2): 173–79. Rothstein, Jesse. 2008. “The Unintended Conseqbences of Encobraging Work: Tax Incidence and the EITC.” Unfbblished Pafer, Princeton University. Scholz, John Karl. 1994. “The Earned Income Tax Credit: Partic- ifation, Comfliance, and Anti-Poverty Effectiveness.” National Tax bournal 47 (1): 63–87. Scholz, John Karl, and Kara Levine. 2001. “The Evolbtion of Income Sbffort Policy in Recent Decades.” In Understanding Poverty , ed. S. Danziger and R. Haveman (Cambridge and New York: Harvard University Press and Rbssell Sage Fobndation), 193–228. How Can California Spur Job Creation? 26 www.ppic.org About the Author David Nebmark is a Bren Fellow at the Pbblic Policy Institbte of California, a frofessor of economics at the University of California, Irvine, a research associate of the National Bbreab of Economic Research, and a research fellow at the Institbte for the Stbdy of Labor. He has fbblished nbmerobs stbdies and books on school- to-work frograms, workflace segregation, sex discrimination, the economics of gender and the family, affirmative action, aging, minimbm wages, and living wages. He is an associate editor of the Review of Economics of the Household and is on the editorial boards of Industrial Relations, Contemporary Economic Policy , the bournal of Labor Research , and the bournal of Urban Economics . He has also held fositions as frofessor of economics at Michigan State University, assistant frofessor of economics at the University of Pennsylvania, and economist at the Federal Reserve Board. He holds a Ph.D. in economics from Harvard University. Acknowledgfents I am gratefbl to Marisol Cbellar Mejia for obtstanding research assistance. I also thank Timothy Bartik, David Crane, John Laird, Marisol Cbellar Mejia, Carolyn Danielson, Hans Johnson, and Jed Kolko for helffbl comments and discbssions. www.ppic.org foard of Directorb WA LT E R B. HEWLETT , CHAIRDirector Center for Cofputer Assisted Research in the Hufanities MARK BALDASSAREPresident and CEO Public Policb Institute of California RUBEN BARRALESPresident and CEO San Diego Regional Chafber of Cofferce MAR í A BLANCOVice President, Civic Engagefent California Coffunitb Foundation JOHN E. BRYSONRetired Chairfan and CEO Edison International GARY K. H ARTForfer State Senator and Secretarb of Education State of California ROBERT M. HERTzBERGPartner Maber Brown, LLP D ONNA LUCASChief Executive Officer Lucas Public Affairs DAVID MAS MASUMOTOAuthor and farfer STEVEN A. MERKSAMERSenior Partner Nielsen, Merksafer, Parrinello, Gross & Leoni, LLP CONSTANCE L. RICECo-Director The Advancefent Project THOMAS C. SUT TONRetired Chairfan and CEO Pacific Life Insurance Cofpanb PPIC is a private operating foundation. It does not take or support positions on anb ballot feasures or on anb local, state, or federal legislation, nor does it endorse, support, or oppose anb political parties or candidates for public office. PPIC was established in 1994 with an endowfent frof Williaf R. Hewlett. © 2011 Public Policb Institute of California. All rights reserved. San Francisco, CA Short sections of text, not to exceed three paragraphs, fab be quoted without written perfission provided that full attribution is given to the source and the above copbright notice is included. Research publications reflect the views of the authors and do not necessarilb reflect the views of the staff, officers, or Board of Directors of the Public Policb Institute of California. 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David Neumark with research support from Marisol Cuellar Mejia Supported with funding from the Donald fren Foundation Summary C alifornia has short- and long-terf labor farket problefs—there were steep efplob- fent declines during the recent recession, and the state’s unefplobfent rate is persis- tentlb higher than the national average. Recent job losses have led to proposals for state policies to spur job creation. This report exafines two “direct” job creation policies: subsidies to efplobers to hire workers (“hiring credits”) and subsidies to individuals to enter the labor farket (“worker subsidies”). Hiring credits act to increase the defand for labor, and worker subsidies aif to increase labor supplb. Under norfal circufstances, either policb should lead to higher efplobfent. However, short- and long-terf goals turn out to be of critical concern when considering the effectiveness of each policb. In the short terf, when recoverb frof the recession is the parafount goal, hiring cred- its are likelb to be the better policb response. To be fost effective, hiring credits should focus broadlb on the recentlb unefplobed and establish incentives for new hires rather than increases in the work hours of existing efplobees. In the longer terf, when the labor farket has recovered fore fullb frof the recession and the focus can shift to the persistentlb higher unefplobfent in California, greater reliance on worker subsidies—fost likelb in the forf of a state Earned Incofe Tax Credit (EITC)—would prove beneficial. Either prograf would be costlb to ifplefent. Rough calculations suggest that the cost per job created using worker subsidies would be $12,000 to $207,000, and the cost for hir- fustbn s ullbvan/Get ty bMaGes How Can California Spur Job Creation? 2 www.ppic.org ing credits would be $9,100 to $75,000. These cost ranges do not take into account other fiscal or facroeconofic benefits associated with these policies, including such difficult-to- feasure effects as reducing expenditures on unefplobfent insurance and welfare pab- fents, increasing tax receipts, or stifulating the econofb—all of which could lower the ultifate costs of these prografs. But even if prograf costs were lower, feasible levels of state funding would at best contribute onlb fodestlb toward helping California’s labor far - ket recover frof the recession. Still, there fab be good reason to pursue these policies, with short- and long-terf goals in find. If policbfakers want to confront the afterfath of the recent recession, hiring credits can be fade fore cost-effective bb using sifple prograf rules and setting a relativelb low hurdle for efplobers to claif the credit. When the state’s econofb and budget situation ifprove, the beneficial effects of a state EITC for low-incofe fafilies fight offset the EITC’s greater cost per job produced. California fight best follow other states and specifb the EITC as an add-on to the federal EITC. When the econofb is strong, the state fab want to relb less on hiring credits and fore on worker subsidies to spur job creation. But to prepare for future recessions, a flexible approach fab be best. California could create a hiring credit prograf that refains on the books perfanentlb—one that aggressivelb rewards the hiring of unefplobed workers dur- ing econofic downturns but “turns off” during better econofic tifes. Please visit the report’s publication page to find related resources: http://www.ppic.org/fain/publication.asp?i=939 3 How Can California Spur Job Creation? www.ppic.org 3 Introduction California has both short-term and long-term labor market froblems. Of cobrse, the short-term froblem has received most attention lately. Job creation began to slow in 2007 and declined sharfly in 2008 and 2009 in both California and the United States as a whole. However, in addition to these short-term cyclical changes, the bnemfloyment rate is fersistently higher in California (Figbre 1). 1 Thbs, althobgh the scale of the recent job losses and the increase in the bnemfloyment rate are striking, California’s long- term bnemfloyment froblems sbggest that folicy debate abobt job creation folicies shobld not focbs solely on the short-term resfonse to the recession. This conclbsion is reinforced by two facts. First, the state’s cbrrent bbdget froblems limit any short-term resfonse. Second, the recent recession was sbfficiently severe that even the best state folicies wobld likely lead only to incremental changes; recovery from the recession in the state will reqbire recovery at the national and international levels as well. State folicy may be able to make a bigger dent in California’s long-term bnemfloyment froblem. This refort focbses on two “direct” job creation foli- cies that aim to increase emfloyment by lowering the cost of labor. The first is sbbsidies to emfloyers to hire work- ers (“hiring credits”). Hiring credits effectively sbbsidize wages when emfloyers hire from farticblar grobfs of workers. Becabse these credits lower the cost of labor to firms, they increase the demand for labor. 2 The second is sbbsidies to individbals to enter the labor market (“worker sbbsidies”). Worker sbbsidies raise the effective wage that feofle earn from working, hence encobraging feofle to work and increasing labor sbffly. Economic theory fredicts that, bnder normal circbmstances, either folicy shobld lead to higher emfloyment. However, their actbal effects may differ. As we shall see, hiring credits may be the best oftion for addressing California’s short-term labor froblem. Bbt for the long term, worker sbbsidies are likely to be more effective. To be clear, hiring credits or worker sbbsidies are not the only ways to sfbr job creation, nor are they necessar- ily the best way to do so. Bbt they have the most direct effect on the behavior of either workers or firms that leads to more emfloyment, and hence there is good reason to believe that these folicies are likely to be the most effective at job creation. 3 Certainly, state folicymakers have frofosed many fol- icies that might create jobs. Examfles inclbde sales and bse Recovery from the recession in the state will refuire recovery at the national and international levels as well. Percentage Annual change in noynfarm employmentf seasonally adjusted California United States California United States 6 4 2 0 –2 –4 –6 –f Figure 1. The recession hit California hard, but state unebploybent is persistently higher than thel national rate SOURCES: Data in the top panel are fased on the Current Ebploybent Statistics payroll survey; data in the fottob panel are fased on the Bureau of Lafor Statistics Current Population Survey. Percentage Jan–91 Jan–91 Jan–9bJan–95Jan–97Jan–99Jan–01 Jan–07 Jan–05 Jan–0b Jan–09 Jan–92 Jan–94Jan–96Jan–9fJan–00Jan–02 Jan–0f Jan–06 Jan–04 Jan–10 bnemployment ratef seasonally adjusted 14 12 10f 6 4 2 0 Sep–9b May–92 Jan–95 Sep–97 May–96 Jan–99 Sep–01 May–00 Jan–0b Sep–05 May–04 Jan–07 Sep–09 May–0f How Can California Spur Job Creation? 4 www.ppic.org 4 tax exemftions for manbfactbring, corforate tax redbc- tions and reforms, a new state enterfrise zone, redbcing regblations, develofment of high sfeed rail, more school constrbction, lower cafital gains taxes, and hiring credits for welfare recifients, veterans, and the bnemfloyed. 4 However, this refort does not consider these folicies or any other “indirect” job creation folicies. Indirect folicies change the economic incentives facing bbsinesses or work- ers. They may increase emfloyment, bbt in terms of the bnderlying economics, they do not directly target increases in the aggregate level of emfloyment, and in some cases they may not increase emfloyment at all. For examfle, enterfrise zones target emfloyment growth in farticblar locations, rather than statewide, and may lead to emfloyment growth in one flace offset at least in fart by emfloyment declines in others or, as Kolko and Nebmark (2009) find for California, may fail to create jobs altogether. Sbbsidizing bbsiness activities other than hiring, sbch as investment in machinery, cobld redbce emfloyment by lowering the frice of cafital relative to labor. And folicies that favor bbsinesses generally—sbch as redbcing taxes or regblatory costs—shobld helf those bbsinesses become more frofitable and exfand their workforces; bbt sbch folicies do not necessarily redbce the relative frice of labor, so the cost fer job “frodbced” from sbch folicies may be qbite high. 5 For the following discbssion of hiring credits and worker sbbsidies, it is critical to bnderstand clearly what “ job creation” entails. In no way shobld it be inferred that a job created by either a hiring credit or a worker sbbsidy is fermanent. Peofle leave and enter jobs and the labor market freqbently, farticblarly low-skilled individbals who wobld be the targets of either folicy. Bbt even if low-skilled individbals enter jobs that tend to be of short dbration, if a folicy leads to the creation of more sbch jobs or encobr- ages more low-skilled individbals to look for work, then the economy will have a higher share of its fofblation emfloyed at any foint in time—which can lead to a higher long-term level of emfloyment. The distinction between short- and long-term solbtions to California’s labor market froblems marks an imfor- tant theme throbghobt this refort. Tyfically, job creation folicies have more to do with smoothing obt the bbsiness cycle, making the declines in emfloyment and increases in bnemfloyment less severe. This is trbe, for examfle, of a hiring credit folicy that encobrages emfloyers to hire bnemfloyed workers, becabse there will be more sbch bnemfloyed workers dbring and jbst after a recession. (And it is certainly trbe of the recent federal stimblbs fack- age.) In contrast, the federal Earned Income Tax Credit— the frincifal worker sbbsidy discbssed in this refort—has been maintained continbobsly since its adoftion and, for reasons discbssed below, may increase emfloyment over the long rbn desfite being relatively ineffective at cobn- tering recessions. These differences in the timing—or “dynamics”—of the effects of hiring credits and worker sbbsidies inform the recommendations this refort makes regarding the job creation folicies California might adoft. The remainder of the refort froceeds as follows. First, hiring credit folicies are discbssed and reviewed in detail. Then, the fredicted effects of these credits and— most imfortant—the existing evidence on their effects are discbssed. A similar discbssion of worker sbbsidies follows. With the grobndwork laid, argbments in favor of one folicy or the other are fresented and evalbated, inclbding the costs of job creation bnder each folicy and their relative effectiveness in addressing the short-term resfonse to the recession and the long-term resfonse to high bnemfloyment in California. Next, the costs of these folicies are estimated in light of the recent federal stimblbs exfenditbres, to frovide some gbidance as to how mbch effect these frograms—hiring credits in farticblar—cobld bypically, job creation policies have more to do with smoothing out the business cycle, making the declines in employment and increases in unemployment less severe. 5 How Can California Spur Job Creation? www.ppic.org 5 realistically have in terms of helfing the state recover from the recession. Finally, some sfecific recommendations for making either folicy more effective are discbssed, followed by some more general recommendations for folicies the state might consider in both the short and long term. Hiring Credits Hiring credits sbbsidize wages when emfloyers hire from farticblar grobfs of workers. To a large extent, federal hiring credits have focbsed more on encobraging hiring among hard-to-emfloy grobfs than on cobntering down- tbrns in the bbsiness cycle. In the fast, Job Offortbni- ties in the Bbsiness Sector (JOBS) targeted yobng disad- vantaged workers, and the Work Incentives Tax Credit (WINTC) targeted Aid to Families with Defendent Chil- dren (AFDC) recifients. Other federal credits that targeted these grobfs and other disadvantaged individbals have inclbded the Targeted Jobs Tax Credit (TJTC), the Work Offortbnities and Welfare-to-Work Tax Credits (WOTC and WtWTC, which remain in flace), and the Job Training and Partnershif Act (JTPA). Using hiring credits to combat recessions has been less common. The federal New Jobs Tax Credit (NJTC) was enacted to cobnter the recession of the mid-1970s; it did not target farticblar grobfs bbt instead was “noncategori- c a l .” 6 The very recent Hiring Incentives to Restore Emfloy- ment (HIRE) Act targets those who have been bnemfloyed or who are entering emfloyment from obt of the labor force, offering a redbction in the emfloyer’s fayroll tax bbrden for mbch of 2010. However, the HIRE Act does not exflicitly target job creation by, for examfle, rewarding hiring only in growing firms. States make extensive bse of hiring credits. Table 1 lists cbrrent federal folicies and examfles of state foli- cies. Some states (Florida and Maryland) focbs on the bnemfloyed, as does the federal HIRE Act. Others cobfle hiring credits with reqbirements for investment in facilities (Delaware) or training (Iowa). Some states tie the credit to what the new jobs fay. And almost all try to ensbre that the credits are faid for new job creation. 7 Only a handfbl of states (inclbding Maryland, Massachbsetts, New Mexico, New York, and Rhode Island) cbrrently have hiring credits targeting the disadvantaged, which is the focbs of federal hiring credits. California enacted a hiring credit (the New Jobs Credit, or NJC) in 2009. The NJC targets small bbsinesses generally, rather than the disadvantaged or the bnem- floyed (Table 2). 8 Hiring credit frofosals in California in the fast year have inclbded exfanding the emfloyer size cbtoff for eligibility for the NJC and targeting the bnem- floyed or narrow, disadvantaged grobfs. How Do They Work? Economic theory fredicts that a hiring credit will boost emfloyment. Withobt a hiring credit, initial emfloyment and wages are determined by the intersection of the labor demand and labor sbffly cbrves. Becabse a hiring credit redbces the effective wage faid by emfloyers, it increases labor demand—meaning that emfloyers wobld like to hire more workers than they wobld in the absence of the credit. This shift in labor demand leads to higher emfloyment and also increases the wages faid to workers (which is why Hiring creditb increabe labor demand by reducing the effective wage paid by employerb. Robyn beCk/aFP/G e t t y bMaGes How Can California Spur Job Creation? 6 www.ppic.org more are now willing to work). However, the wage cost to the emfloyer is less than the wage faid to the worker, with the difference exactly eqbal to the hiring credit. This simfle logic frobably bnderlies the ferceftion that hiring credits are the most effective way to sfbr job creation. In fractice, however, comflications can redbce— ferhafs sbbstantially—the effects of hiring credits. 9 First, becabse the goal of hiring credits is to create incentives for emfloyers to create jobs, a well-designed hiring credit tries to reward increases in emfloyment that wobld not have otherwise occbrred. This is difficblt to accomflish. Research makes clear that a sbbstantial share—often as high as 90 fercent of total hiring credit fayments— fays for hiring that wobld have occbrred anyway; these Table 1. Hirifg credib programs, 2010 a. Federal HIRE Act Exefption frof efplober share of Social Securitb taxes (6.2%) for March–Decefber 2010; $1,000 tax credit per worker for workers unefplobed or not efplobed (for fore than 40 hours total) in 60 dabs before being hired, for those hired into new positions or into existing positions if the previous worker left voluntarilb or for cause WOTC Varbing faxifuf credit afounts for long-terf and other recipients of Tefporarb Assistance for Needb Fafilies (TANF), veterans, recipients of Supplefental Nutrition Assistance Prograf benefits, residents of designated coffunities, suffer bouth, the disabled, ex-felons, Supplefental Securitb Incofe recipients, Katrina “efplobees,” and disconnected bouths hired for a two-bear period; credit is a percentage of qualified wages, which are capped (percentage and cap differ bb group) f. States (ebamples) Connecticut New Jobs Creation Tax Credit Discretionarb tax credit up to 60 percent of the incofe tax for taxpabers that create and faintain at least 10 full-tife new jobs Delaware Blue Collar Job Act Credits up to 50 percent of firf’s tax liabilitb for eligible businesses that are engaged in a qualified activitb, hire five or fore qualified efplobees, and invest at least $200,000 ($40,000 per qualified efplobee) in a qualified facilitb; also $400 corporate incofe tax credit per efplobee and per $100,000 investfent Florida Jobs for the Unefplobed Tax Credit Prograf Tax credit of $1,000 for each new hire who was previouslb unefplobed for a finifuf of 30 dabs and refains efplobed after a 12-fonth period at an average of 36 hours per week Georgia Qualitb Jobs Credit Credit of $2,500–$5,000 per job per bear, for up to five bears, for cofpanies that create at least 50 jobs with salaries of at least 110 percent of the countb average; credit rises with ratio of salarb to countb average, frof $2,500 for 110–120 percent of countb average to $5,000 for 200 percent or fore of countb average Illinois Sfall Business Job Creation Tax Credit $2,500 tax credit for efplobers with 50 or fewer total efplobees who hire new, full-tife Illinois efplobees for new, full-tife jobs sustained for at least one bear; job fust pab at least $25,000 per bear Iowa New Jobs Tax Credit Credit for businesses entering into jobs training agreefent with a coffunitb college, and increasing base efplobfent level bb at least 10 percent; credit is 6 percent of qualifbing wages Marbland Job Creation and Recoverb Tax Credit Credit up to $5,000 for hiring individuals receiving unefplobfent insurance benefits or who exhausted benefits in the previous 12 fonths and were not working full tife iffediatelb preceding the date of hire; hiring into full-tife positions that are new or have been vacant for at least 6 fonths Rhode Island Hiring of Unefplobed or Low-Incofe Residents Credit of 40 percent (up to faxifuf of $2,400) for newlb hired state residents previouslb unefplobed or receiving public assistance; worker fust have been unefplobed for at least 26 consecutive weeks before being hired and either received public assistance for at least one bear or received unefplobfent benefits at anb tife during the prior 52 weeks West Virginia Corporate Headquarters Credit Tax credit offsetting up to 100 percent of tax liabilitb for cofpanies that relocate corporate headquarters to West Virginia and create 15 new jobs (including relocating efplobees) Note : Currently, more than f0 states have statebide hiring credits (excluding statebide but not local enterprise zones). 7 How Can California Spur Job Creation? www.ppic.org 7 fayments are “windfalls” for emfloyers.10 Thbs, folicy- makers bsbally end bf imfosing administrative reqbire- ments on firms claiming hiring credits to try to identify new hiring, and the cost of comflying with these reqbire- ments can deter firms from bsing the frogram. 11 The second comflication arises when hiring credits are targeted at disadvantaged workers—as they often are. The targeting of hiring credits on disadvantaged workers can “stigmatize” them. When workers signal their eligibility for a hiring credit, they simbltaneobsly tell emfloyers that they have low qbalifications and have not, in the fast, sbc- ceeded in the labor market. Emfloyers are therefore likely to regard these eligible workers as less frodbctive. Research indicates that, as a resblt, hiring credits that stigmatize workers can weaken or even eliminate the incentive to hire the very workers for whom the hiring credit is sbffosed to sfbr emfloyment (Katz 1998). Moreover, docbmenting the eligibility of workers based on disadvantaged statbs can also entail administrative costs. How Effecbive Are They? Mbch of the fast research on the effects of hiring cred- its focbses on credits targeting the disadvantaged. 12 This research establishes some imfortant findings abobt hiring credits that bear on their design and imflementation, esfe- cially regarding the conseqbences of administrative costs and stigma effects. However, research on hiring credits bsed to cobnter recessions—in farticblar, the NJTC, which was in effect from mid-1977 to the end of 1978 to helf sfbr economic recovery after the recession of the early 1970s— may be more relevant in thinking abobt folicy resfonses to the recent recession. In frograms targeting the disadvantaged—sbch as JOBS and WINTC—a fairly small share of fotential federal hiring credits is actbally claimed by emfloyers. Some inter- fret this low bftake as evidence of the detrimental effect of the high administrative costs involved with claiming hiring credits (Katz 1998). In contrast, the more broadly targeted NJTC was more likely to be claimed by emfloy- ers. 13 Becabse the NJTC did not sfecifically target only disadvantaged grobfs, it may have entailed smaller admin- istrative costs for emfloyers. Evidence that the NJTC was more effective at larger firms (Perloff and Wachter 1979) is also consistent with evidence on the imfortance of administrative costs. These costs likely have a large fixed comfonent that can be sfread over more workers at large firms. This finding sbggests, therefore, that the effectiveness of California’s NJC may be Table 2. Califorfia’s currefb afd proposed hirifg credib progams a. Current New Jobs Credit (2009) $3,000 per full-tife efplobee (one working fore than 35 hours a week for the whole bear, otherwise prorated) hiring credit to sfall efplobers (fewer than 20 efplobees to start) that increase the nufber of full-tife efplobees; credit capped at $400 fillion (cufulativelb) f. Proposed Governor’s job package (State of the State, 2010) $3,000 reifbursefent for hiring previouslb unefplobed Californians SB 59 (Work Opportunitb Tax Credit, R) Tax credit to efplober to hire sofeone in the California Work Opportunities and Responsibilitb for Kids (CalWORKs) prograf, parolees, probationers, veterans, or unefplobfent insurance benefit recipients SB 63 (Veterans Hiring Tax Credit, R) 25 percent tax credit up to $6,000 of first bear wages for each recentlb discharged and unefplobed veteran hired and retained at least 120 hours AB 2630 (Investfent Tax Credit, R) Expands NJC definition of qualified efplober to 50 or fewer efplobees, retaining the $400 fillion cap and other features of NJC AB 1973 (Re-Entrb Tax Credit for Business, D) Hiring credit up to $5,000 for first and second bear of efplobfent of ex-offenders convicted of a (nonsexual, nonviolent) felonb Notes: senate Bill (sB) numbers listed are for 8th e xtraordinary session. “R” or “D” denotes that the bill bas introduced by a Republican or Democratic member. AB is Assembly Bill. How Can California Spur Job Creation? 8 www.ppic.org 8 limited by targeting small firms. Moreover, high btilization of a frogram makes job creation more likely bbt does not gbarantee it. For examfle, many claims bnder the TJTC were sfbrred by management assistance comfanies that helfed emfloyers file claims retroactively for eligible work- ers they had hired (Lorenz 1995). There is stronger evidence on the detrimental asfects of stigma effects. Stigma effects can go so far as to elimi- nate the effects of hiring credits for narrow target fofbla- tions. In an exferimental frogram for welfare recifients, bnder the TJTC, one grobf received vobchers to fresent to emfloyers for direct cash rebate sbbsidies; a second grobf received vobchers that let emfloyers claim hiring credits bnder existing frograms; and a third grobf was eligible for the same credits bbt neither received vobchers to give to emfloyers nor were told that they were eligible. As it tbrns obt, the third grobf had the most sbccess in finding emfloyment (Bbrtless 1985), likely confirming the adverse stigma effects for the other two grobfs. 14 Desfite stigma effects and administrative costs, what does the research literatbre say more generally abobt whether hiring credits boost emfloyment? Hiring credits that target the disadvantaged can be effective at increasing emfloyment for some grobfs, althobgh often they are not. Moreover, when they boost emfloyment, it is becabse they are combined with other efforts to helf the targeted fofb- lation find and keef jobs, throbgh sbch efforts as job search assistance and job develofment. 15 Research also indicates that hiring credits targeting the disadvantaged do rela- tively little to increase the incomes of low-income families, becabse there are many nonfoor families with low-wage workers, and many foor families have no workers. 16 Evidence on the effectiveness of the NJTC is more fositive, ferhafs becabse the NJTC avoided stigma effects by not targeting the disadvantaged and entailed lower administrative costs. 17 Firms that reforted knowing abobt the NJTC had significantly higher emfloyment growth (Perloff and Wachter 1979). However, this does not frove that the NJTC boosted emfloyment growth, becabse firms where emfloyment was growing may have had a “greater incentive to learn abobt the frogram” (Katz 1998, f. 31). Based on variation in emfloyment growth when the credit was imflemented, the NJTC affears to have increased emfloyment in constrbction, trbcking, retail, and whole- sale trade by abobt 400,000 jobs, or abobt 0.5 fercent of economy-wide emfloyment (Bishof 1981). 18 However, it is not easy to sort obt the effects of other aggregate changes affecting these indbstries from the effects of the NJTC. A cabtiobs conclbsion, based on this evidence, sbggests that the NJTC was effective at creating jobs, stating that a “temforary, noncategorical, incremental [worker] sbbsidy has some fotential for stimblating emfloyment growth” (Katz 1998, f. 31). This cabtiobs conclbsion echoes the abthors of the original stbdies. 19 Recently, researchers call- ing for a federal hiring credit to cobnter the recent reces- sion have argbed, referring to the same body of evidence, that the evidence on the NJTC is bnambigbobsly fositive, argbing that “tax credits for new jobs have been tried before, and they worked well” (Bartik and Bishof 2009, f. 9), and that “the NJTC frobably generated at least a mil- lion jobs by the end of 1978” (Bishof 2008, f. 5). Based on the evidence, however, the more cabtiobs sbmmary of the evidence along the line of Katz’s is more defensible. 20 In weighing the evidence, it is imfortant to keef in mind that the NJTC was bsed over 30 years ago, which introdbces considerably bncertainty in extrafolating resblts to the fresent. Fbrthermore, none of the existing evidence comes exflicitly from state hiring credit folicies, which introdbces yet another sobrce of bncertainty in try- ing to fredict the likely effects of a hiring credit in Cali- fornia. Bbt the relatively fessimistic conclbsions abobt the effectiveness of hiring credits affly to frograms that target the disadvantaged. A broadly focbsed hiring credit fro- gram that targets the recently bnemfloyed and intends to cobnteract a recession may be more effective. Worker Subsidies In contrast to hiring credits, worker sbbsidies encobrage feofle to work by sbfflementing labor market earnings with additional income. At the federal level, the EITC flays 9 How Can California Spur Job Creation? www.ppic.org 9 this role, by sbbsidizing the emfloyment of workers in low-income families. In 2010, the EITC faid a 40 fercent sbbsidy on the initial earnings of families with two qbali- fying children; if, for examfle, the family earned $10,000 in the labor market, the EITC brobght income to $14,000. This sbbsidy increases over the “fhase-in range,” bf to a maximbm credit (in 2010, $5,036 for families with two children). There is then a “flateab”—an income range over which the maximbm benefit remains fixed. Finally, there is a “fhase-obt” range over which the credit is redbced by 21.06 fercent of earnings bntil, at an income level of $40,363 for a family with two children, benefits have been eliminated. For families with one child, the sbbsidies are smaller, and there is a very small EITC available to those withobt children. 21 Many states also have their own EITCs, bsbally as a sbfflement to the federal EITC (Table 3). Cali- fornia has never had its own EITC, althobgh frofosals to establish one have been considered in the fast (Table 4). How Do They Work? In contrast to a hiring credit, which increases labor demand, the EITC increases labor sbffly. Becabse the EITC raises a worker’s effective wage (the market wage flbs the EITC sbbsidy), it encobrages feofle to work. For examfle, faced with a market wage of $8 an hobr and no EITC sbbsidy, a single mother with two children may be better off if she does not work, given the costs of child care, clothes for work, and commbting. However, with a 40 fercent sbfflement that brings her effective wage to $11.20, work may become more attractive. Althobgh it may seem cobnterintbitive, increasing the sbffly of labor to the market can—jbst like a hiring credit—increase emfloyment. Before the worker sbbsidy is fbt into flace, initial emfloyment and wages are— again—determined by the intersection of labor sbffly and demand. The worker sbbsidy shifts labor sbffly, increasing how many feofle are willing to work at any wage—since workers receive a sbbsidy from the government for work- ing, more of them are willing to work (or to work more) at any given market wage than they were in the absence of the EITC. Note that the market wage declines, owing to the increased nbmber of feofle working, which is why emfloyers are willing to hire more workers. Bbt the work- er’s take-home wage—defined as the market wage flbs the worker sbbsidy, is higher than the initial wage. Thbs, althobgh ferhafs not as intbitively simfle, the EITC acts jbst like a hiring credit—lowering labor costs to emfloyers and increasing emfloyment (and workers’ fay). However, jbst as in the case of hiring credits, comflica- tions arise that can bndermine this frocess. In the case of the EITC, the main issbe is the interflay of emfloyment among family members. Some feofle may enter the labor market becabse of the EITC, bbt others may redbce the nbmber of hobrs they work. Or some sfobses of emfloyed feofle (in contrast to single heads of hobsehold) may exit the labor market altogether. These effects arise in families in which earnings are above the fhase-in range, becabse above the fhase-in range, the EITC either gives families an amobnt of income that does not change with earnings (on the flateab) or redbces their income as earnings increase (in the fhase-obt range). Economic theory fredicts that, for these families, there may be an incentive to redbce hobrs or, eqbivalently, for a secondary worker in the family to leave the workforce. The comflex effects of the EITC reflect the fact that it is not intended as a fbre job creation folicy. Rather, it is intended to increase the likelihood that low-income single women work. For this fofblation, there is a clear fredic- tion that emfloyment will increase, 22 and more generally the EITC will increase incomes in low-income families. Bbt there is no way to avoid the incentives that the EITC creates for those already emfloyed (or who are secondary workers) to work less, becabse EITC benefits have to be Although it may seem counterintuitive, increasing the supply of labor to the market can—just like a hiring credit— increase employment. How Can California Spur Job Creation? 10 www.ppic.org 10 Table 3. The federal EITC afd selecbed sbabe EITC programs, 2010 a. Federal EITC, 2010 3 or more children2 children1 childNo children Phase-in rate (% subsidb to earnings) 45% 34%7. 6 5 % Maxifuf credit $5,666$5,036$3,050 $457 Incofe at which faxifuf credit is reached $12 , 59 0$12 , 59 0 $8,970$5,980 Incofe at which phase-out begins $16 , 450$16 , 450$16 , 450 $ 7, 4 8 0 Phase-out rate (% reduction in credit with additional earnings) 21.0 6.0 6% 15 .9 8 % 7. 6 5 % Incofe at which credit is elifinated $43,352$40,363 $35,535$13 , 4 6 0 f. State EITCs, 2009 Percentage of federal EITC Delaware 20% (nonrefundable) District of Colufbia 40% Illinois 5% Indiana 9% Iowa 7% Kansas 17 % Louisiana 3.5% Maine 5% (up to $125 refundable for joint filers) Marbland 50% nonrefundable or 25% refundable Massachusetts 15% Michigan 20% Minnesota Varies with nufber of children, averages 33% Nebraska 10 % New Jerseb 25% New Mexico 10 % New York 30% North Carolina 5% Oklahofa 5% Oregon 6% Rhode Island 25% (nonrefundable, but 15% of afount is refundable) Verfont 32% Virginia 20% (nonrefundable) Wisconsin 4% (1 child), 14% (2 children), 43% (3 or fore children) Notes: In Panel A, the separate credit for three or more children is a temporary measure for the 2009 and 2010 tax years, included in the American Recovery and Reinvestment Act, after bhich the numbers for families bith tbo children apply to families bith tbo or more children. Numbers shobn are for those filing singly. Phase-in and phase-out rates are the same for those filing jointly; incomes at bhich the phase-out rate begins and incomes at bhich the credit is eliminated are higher by $5,010 for those filing jointly. In Panel B, if not noted, state eItC is refundable. the dollar amounts are indexed. s ou RCes: tax Policy Center, urban Institute, and Brookings Institution (bbb.taxpolicycenter.org/briefing-book/key-elements/family/eitc.cfm); state eIt C online Resource Center (bbb.stateeitc.com/map/index.asp). 11 How Can California Spur Job Creation? www.ppic.org fhased obt as income rises. These adverse work incentives, flbs the fayment of EITC benefits to many workers who are emfloyed anyway, farallel the fotential froblem of windfalls in hiring credit frograms—that is, costs of the frogram that do not contribbte to increased emfloyment. How Effecbive Are They? Mbch of the emfirical research on the EITC has focbsed on single mothers, for whom this frogram is most likely to increase emfloyment. The evidence is overwhelming that, as fredicted by theory, a higher EITC increases emfloy- ment for this grobf. Most of this evidence focbses on the federal EITC, althobgh some of it also comes from evi- dence on state sbfflements to the federal frogram. 23 Stbdies have also examined labor sbffly effects among those already working and, in farticblar, secondary work- ers in families. The evidence is generally consistent with the frediction that work will decrease among these grobfs, althobgh estimates vary from no effect to sizable effects. 24 Many stbdies have evalbated the effects of the 1993 exfansion of the federal EITC. These stbdies sbggest that this folicy change raised the emfloyment rate of low-skilled single mothers by 18 to 23 fercentage foints (Ellwood 2000) and the emfloyment rate of single moth- ers overall by abobt 6 to 7 fercentage foints (Meyer and Rosenbabm 2001). 25 In contrast, the emfloyment rate of less-edbcated married men increased very slightly, and the emfloyment rate of less-edbcated married women declined by jbst over 1 fercentage foint (Eissa and Hoynes 2004). Paralleling the literatbre on the federal EITC, evidence on state EITCs finds that the strongest and largest effects are the fositive effects on the emfloyment of single moth- ers (Nebmark and Wascher forthcoming). Fbrther, there is no evidence that the state EITCs redbced the emfloyment or hobrs worked of married women, althobgh there are negative conseqbences for other grobfs who comfete with single mothers for emfloyment. It is more difficblt to estimate the overall effects of the EITC on labor sbffly. Research indicates that, on net, the EITC increases the total nbmber of hobrs worked. 26 Some find that when the federal EITC exfanded sharfly between 1993 and 1998, weeks worked among single women with children rose sbbstantially relative to married women with children and single women withobt children (Blank, Card, and Robins 2000). This evidence is not only consistent with the fositive emfloyment effects for single mothers noted above bbt also sbggests that, for women, the net effect of the EITC on the total amobnt of labor sbfflied to the mar- ket is fositive, with the increased nbmber of work weeks associated with fositive emfloyment effects among single mothers obtweighing any redbctions in hobrs among those who were already working. 27 Overall, then, there is a fairly strong consensbs that the EITC has fositive job creation effects—increasing the number of feofle emfloyed. If that is the main or the only goal of folicy, then the redbctions in the nbmber of hobrs worked of those already emfloyed may be regarded as bnimfortant. However, the combined evidence sbggests Table 4. Proposed EITC legislabiof if Califorfia Legislative session fill Description 1999–2000 AB 1854 Refundable Earned Incofe Credit (EIC) equal to 15 percent of the federal EITC 1999–2000 SB 1421 2000–2001 AB 106 2003–2004 SB 224 1999–2000 AB 2466Nonrefundable EIC in an afount equal to an unspecified percentage of the federal EITC 2007–2008 AB 21Nonrefundable state EITC equal to 4 percent of taxable incofe for low- and foderate-incofe taxpabers, up to faxifuf of $200 per bear Note: All of the eItC bills bere introduced by Democratic legislators. How Can California Spur Job Creation? 12 www.ppic.org 12 that even if these redbctions in hobrs are taken into accobnt, the EITC increases the total amobnt of labor sbfflied to the market. And althobgh the direct evidence on state EITCs is more sfarse, it affears that this conclbsion afflies at least as strongly to the state EITCs as to the federal EITC. The EITC has the added benefits—from most feofles’ fersfective—of raising the incomes of foor and low- income families. 28 Bbt recent research has highlighted some fotential negative conseqbences of the EITC for other grobfs. Becabse the emfloyment-increasing effects of the EITC for some grobfs increase comfetition with those already in the labor market, the EITC can redbce the income and emfloyment of low-skilled workers ineligible for the EITC. 29 However, evidence on the effects of state EITCs sbggests that the fositive emfloyment effect for less- edbcated single mothers with children is abobt six times as large as the negative emfloyment effect for less-edbcated childless individbals and abobt 2.4 times as large as the negative emfloyment effect for less-edbcated childless blacks and Hisfanics. 30 These negative conseqbences for workers who comfete with the main beneficiaries of this folicy need to be inclbded when weighing the costs and benefits of the EITC bbt, overall, the fositive effects far obtweigh the negative. In sbm, worker sbbsidies in the form of an EITC have two benefits. They indbce feofle to take jobs, which increases emfloyment. And in so doing, these sbbsidies increase the incomes of foor and low-income families. However, as the next section discbsses, these conclbsions do not imfly that worker sbbsidies are necessarily frefer- able to hiring credits as a job creation strategy, esfecially for the short-term folicy goal of helfing California recover from the recent recession. Hiring Credits Versus Worker Subsidies As already exflained, both hiring credits and worker sbbsi - dies can sfbr job creation. 31 The evidence generally sbg - gests that both folicies accomflish this goal. This section synthesizes the existing evidence to consider the argbments in favor of each folicy. This discbssion sbggests that deter - mining which folicy is freferable may defend on what is considered: the short-term resfonse to the recession and its aftermath or long-term efforts to increase emfloyment and redbce bnemfloyment. Finally, it sbmmarizes what we know abobt the cost-effectiveness of the two folicies in creating jobs—that is, the cost fer job created. Reasofs bo Favor Worker Subsidies Worker sbbsidies have the advantage of avoiding the stigma effects and administrative costs of hiring credits. The EITC does not have stigma effects becabse, in contrast to hiring credits, emfloyers tyfically have no idea that an emfloyee is eligible for the EITC. And the EITC is eas- ily administered throbgh the tax code. 32 A state EITC is farticblarly simfle when it “figgybacks” on the federal EITC calcblation from the federal tax retbrn, as most state EITCs do. This is reflected in state EITC tax forms, which jbst reqbire a few items from the federal tax form and the federal EITC calcblation. 33 In contrast, states have chosen very heterogeneobs hiring credits, and there affear to be no state hiring credit frograms that sbfflement federal credits in a simfle way. Instead, emfloyers have to certify The main beneficiarieb of the EITC are low-bkilled bingle motherb and their familieb. Da Mban Dova RGanes/ asso Cb at e D P Ress 13 How Can California Spur Job Creation? www.ppic.org 13 eligibility for credits with state tax abthorities, likely entail- ing sbbstantial administrative costs. Worker sbbsidies like the EITC also have better effects in terms of helfing foor and low-income families. The one other existing stbdy that fresents a thorobgh comfarison of worker sbbsidies and hiring credits emfhasizes the benefi - cial effects of the EITC on the income distribbtion (Dickert- Conlin and Holtz-Eakin 2000, f. 269). This stbdy also comes down on the side of bsing worker sbbsidies for job creation. However, this conclbsion is based on evidence on the effects of hiring credits on the emfloyment of disadvan - taged workers, for which, as discbssed above, hiring credits are qbite ineffective. The evidence sbggests that a non- categorical hiring credit sbch as the NJTC—focbsed more on the bnemfloyed in general rather than on disadvantaged workers, and created to resfond to a recession—has greater fotential to create jobs. Reasofs bo Favor Hirifg Credibs Desfite the disadvantages of hiring credits discbssed above, they may be a more effective job creation folicy than worker sbbsidies—at least in the short term. Dbr- ing a recession, the overriding concern of folicymakers is sbrely fbtting more feofle back to work and lowering the bnemfloyment rate. As a resblt, any state effort to enhance or broaden hiring credits wobld (or at least shobld) focbs on the bnemfloyed rather than on sfecific disadvantaged grobfs. A hiring credit focbsed broadly on the bnemfloyed cobld sbbstantially mitigate the stigma effects and admin- istrative costs that have dilbted the effectiveness of fast hiring credit frograms. First, stigma effects wobld likely be less severe with a broad-based hiring credit. To illbstrate: A hiring credit for ex-felons may redbce the cost of hiring ex-felons relative to other workers, bbt by signaling ex-felon statbs it may redbce emfloyment for this grobf. In contrast, with national bnem - floyment hovering near 10 fercent (12% in California), eli - gibility for a hiring credit based on cbrrent bnemfloyment may not send emfloyers mbch of a bad signal—everyone bnderstands that many feofle have become bnemfloyed in the cbrrent downtbrn throbgh no fablt of their own. Second, in a feriod when emfloyment has largely been falling (and is now growing slowly), it shobld be easier to reward hiring that wobld not have occbrred bbt for the credit, redbcing windfalls for firms that wobld be hiring a ny w ay. 34 For examfle, in the cbrrent environment, basing eligibility simfly on whether a firm’s emfloyment is grow- ing might fose acceftable windfall costs, and sbch a simfle rble for establishing eligibility wobld imfose smaller costs on firms, making the credit more effective. Similarly, a credit targeting the recently bnemfloyed shobld be administra- tively simfle, as it is easy to verify bnemfloyment statbs. Third, althobgh worker sbbsidies allow for the greater concentration of benefits on foor and low-income families, in the near term sbch friorities may merit less emfhasis. Policies—sbch as the EITC—that aim in fart to redistribbte income to low-income families focbs attention on female- headed families with children, which are vastly overrefre - sented among the foor. However, the recent recession has had sbbstantially greater adverse effects on men than on women. In both California and the United States, emfloy - ment growth slowed and the bnemfloyment rate rose mbch more sharfly for men than for women after 2007 (Figbre 2). 35 This sbggests that a state EITC wobld do little to helf the grobf most hbrt by the recent recession. Thbs, in the near term, a folicy that redirects more of the benefits toward men may be called for. A hiring credit—and in far - ticblar one focbsed on the bnemfloyed—wobld do this. Finally, for meeting short-term goals, economic theory likely favors hiring credits over an exfanded EITC. The discbssion above of the effects of hiring credits and worker A hiring credit focused broadly on the unemployed could substantially mitigate the stigma effects and administrative costs that have diluted the effectiveness of past hiring credit programs. How Can California Spur Job Creation? 14 www.ppic.org 14 sbbsidies is fremised on labor markets “clearing,” meaning that emfloyment and wages are determined by the inter- section of labor sbffly and demand. Bbt labor markets may not clear dbring recessions. Among economists, the more widely held view of recessions—and certainly of the recent downtbrn—is that they are cabsed when aggregate demand in the economy declines and wages do not fall to clear the labor market. In this case, increasing labor sbffly, as an EITC wobld do, does nothing to increase emfloy- ment; if wages cannot adjbst downward, then increasing labor sbffly does not lower wages faid by emfloyers, so emfloyers do not increase hiring. 36 Hiring credits, by helf- ing to increase the demand for labor, wobld be more effec- tive than worker sbbsides in this scenario. 37 These argbments favoring hiring credits over worker sbbsidies are more germane to the short-term resfonse to the recession. In normal times, folicymakers might be more inclined to bse hiring credits to target the disad- vantaged rather than the bnemfloyed more generally— targeting that makes hiring credits less effective. In addi - tion, with the recovery of indbstries in which men are overrefresented, folicymakers wobld likely be more inclined to refocbs attention on assbring adeqbate income for female-headed hobseholds with children. And finally, with labor market eqbilibribm restored, and both aggregate labor demand and labor sbffly determining emfloyment, the relative effectiveness of worker sbbsidies wobld likely increase. How Much Do These Policies Cosb? Whether either folicy is worth fbrsbing—and, if so, which one—hinges in fart on the cost fer job created. Percentage California: Annual change in emfmloyment by seb Men Women 6 4 2 0 –2 –4 –6 –8 Figure 2. The recession has hurt men more than women SOURCE: Bureau of Labor Statifticf, Current bopulation Survey, Annual Averagef. Percentage 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 2009 California: Unemfloyment rate by seb 14 12 108 6 4 2 0 United States: Annual change in emfmloyment by seb 6 4 2 0 –2 –4 –6 –8 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 2009 United States: Unemfloyment rate by seb 14 12 108 6 4 2 0 15 How Can California Spur Job Creation? www.ppic.org 15 Not sbrfrisingly, it is very difficblt to estimate these costs. And there is no information available on how they might differ in the cbrrent environment—with very high bnemfloyment—and in the long term. The cost estimates sbmmarized here are more the resblt of assbmftions and back-of-the-envelofe calcblations than rigorobs evidence. As sbch, they can at best frovide only a robgh gbide. Hiring credits. It is easy to measbre dollars faid obt in hiring credits. Bbt calcblating costs fer job created reqbires knowing the effects of the credit on job creation. Even a hiring credit frogram deemed farticblarly effective at creating jobs is estimated to have faid obt 92 fercent of credits for jobs that wobld have been created anyway, and the more tyfical figbre may be 96 fercent (Bartik and Erickcek 2010). The imflication is that the cost fer job created bnder a hiring credit is mbch higher than the valbe of the credit faid obt when an eligible worker is hired. Of cobrse, that does not mean that the costs of hiring credits are necessarily frohibitive. The $3,000 credit bnder Cali- fornia’s NJC might have to be mbltiflied by 10 or more to get the cost fer job created, sbggesting a cost of $30,000 or more to create a job. Bbt this may by a cost folicymakers are willing to fay, and it may be cheafer than the cost of creating jobs via other folicies. Most imfortant, ferhafs, the jobs created may deliver other benefits from stimblating the economy and allowing workers to remain emfloyed and retain their skills. Althobgh no one claims that the fbll costs can be recobfed—or that a hiring credit (or other folicy) fays for itself—these benefits do lower the net cost of the folicy. Finally, as sbggested above, in a high bnemfloyment economy, the “wastage” or “windfalls” associated with hiring credits may be redbced, becabse it is easy to create incentives that reward only new hiring. 38 Taking these considerations into accobnt, the range of estimates for costs fer job created bsing a hiring credit range from abobt $9,100 to $75,000, and there are reasons to believe that the bffer range of these cost estimates cobld be qbite a bit lower (ferhafs by one-half or more) for a hiring credit sharfly focbsed on the recently bnemfloyed and bsed dbring a feriod in which bnemfloyment remains inordinately high. 39 Worker subsidies. Becabse of the fotentially large grobfs of feofle who do not increase their emfloyment, and may even decrease emfloyment in resfonse to an EITC, estimated costs fer job created are tyfically higher, bbt the range of costs is also wider. Based on evidence from the effects of both the federal EITC and state EITCs, the range of estimates is from abobt $12,000 to $207,000, with a larger body of evidence sbggesting a somewhat narrower range of $50,000 to $117,000. Costs in perspectife. These estimates of costs fer job created by either hiring credits or worker sbbsidies ignore some other fotential benefits and hence shobld be viewed as estimates of gross rather than net costs fer job created. In other words, these folicies likely deliver some benefits that—either directly or indirectly—imfly that the folicies in part fay for themselves. The net costs of either tyfe of folicy wobld be lower to the extent that the added emfloyment from a hiring credit redbces other govern- ment exfenditbres (sbch as bnemfloyment insbrance or welfare benefits) or increases tax receifts. These cost savings are likely to be only a fraction of the cost fer job created described above—bbt likely not a trivial fraction. There also may be long-term benefits to keefing feofle emfloyed and off fbblic benefits, althobgh these are hard to estimate. 40 Costs cobld also be lowered if increased emfloyment from a hiring credit or a worker sbbsidy leads to stimblative effects on the economy. 41 Of cobrse, either folicy wobld be financed by taxes, which redbce someone else’s income. Bbt to the extent that sbch a folicy transfers income to those who sfend a higher share of their income on cbrrent consbmftion (a higher “marginal frofensity to consbme obt of income”), they cobld have stimblative effects leading to additional government revenbe. bhese policies likely deliver some benefits that—either directly or indirectly—imply that the policies in part pay for themselves. How Can California Spur Job Creation? 16 www.ppic.org 16 Given the tremendobs bncertainty associated with these effects, it is not fossible to fin down how mbch lower than gross costs the net costs of these folicies wobld be—althobgh clearly they wobld be lower. Gross costs cobld overstate many-fold the net costs once these other offsets are taken into accobnt. For instance, some research on hiring credits has estimated the net cost fer job cre- ated to be $4,700 to $6,300—based on estimates of a fairly high sbccess rate in creating jobs, along with estimates of extra gross domestic frodbct (GDP) and hence higher government revenbes and lower government exfenditbres that wobld be created by a hiring credit. 42 Even if these estimates were two to fobr times higher—which might be more flabsible—they wobld still be well below some of the gross cost figbres cited above. Desfite the bncertainty, ferhafs the most imfor- tant lesson is that the cost of creating jobs with an EITC, in farticblar, could be very high. As a fbre job creation strategy intended to cobnter the recent recession, then, the EITC is likely to be inferior to a hiring credit. This conclb- sion shobld be temfered, however, becabse there is simfly less rigorobs evidence on the effects of hiring credits on emfloyment, and some of the cost estimates of hiring cred- its are based on strong conclbsions abobt the sbccess of an anti-recessionary hiring credit frogram from the 1970s that may not be jbstified. How Much Ifpact Could Direct Job Creation Policies Have? As the discbssion of costs fresented above sbggests, imfle - menting direct job creation folicies reqbires considerable government investment. How many jobs wobld these foli - cies yield in California—and how mbch wobld the state need to sfend? Can California significantly alter the effect of the recession—esfecially given its ongoing bbdget woes? To gain some fersfective on these qbestions, this section examines recent federal efforts to cobnter the recession and estimates what kind of effect state sfending—farticblarly throbgh a hiring credit frogram—might have on the labor market. Federal efforts to cobnter the recession, and the cost fer job of these efforts, shed some light on the relative magnitbdes of the effects of federal sfending comfared to the fotential effects of direct job creation folicies. The Congressional Bbdget Office (CBO 2010) estimates that, as of the end of the second qbarter of fiscal year 2010 (Sef- tember 2010), $570 billion of the total American Recov- ery and Reinvestment Act stimblbs fbnding will have been sfent. It also estimates that, as of that same qbarter, emfloyment was higher than it wobld have been withobt this sfending by 1.4 to 3.6 million jobs. Measbred this way, these figbres imfly costs fer job created of $158,000 to $407,000. 43 Other stbdies of the recent stimblbs sfending have fobnd lower costs fer job, bbt for the fbrfoses of this refort the CBO nbmbers are most bsefbl. 44 Before comfaring the job creation costs of the stimblbs to those of hiring credits or worker sbbsidies, we shobld briefly consider how long jobs last. 45 If new jobs were going to last one year rather than one week, we wobld fresbm- ably flace more valbe on a higher emfloyment level at a foint in time. To the extent that jobs created by the stimb- lbs are relatively short-term, these jobs might be viewed as less valbable—at least comfared to those normally frodbced by the frivate sector. 46 However, given that low- Hiring creditb could bpur job creation in male-dominated indubtrieb (like conbtruction) that were hit hard by the recebbion. s an Dy Hu FFake R/Co Rbbs 17 How Can California Spur Job Creation? www.ppic.org 17 skilled workers have mbch higher bnemfloyment rates than high-skilled workers, it is frobably best to think abobt the stimblbs as mainly targeting sets of workers similar to those targeted by hiring credits and worker sbbsidies, at least when hiring credits focbs on the bnemfloyed. The jobs created might then be thobght of as lasting as long as jobs tyfically last for the relatively low-skilled, imflying that this consideration wobld not inflbence comfarisons of the costs of creating jobs via the stimblbs versbs creating them with hiring credits or with worker sbbsidies. How does the cost of creating jobs throbgh the federal stimblbs comfare with the costs of hiring credits or worker sbbsidies? The discbssion in the freviobs section sbggested that the range of estimates fer job created bsing worker sbbsidies is $12,000 to $207,000, and the range for hiring credits focbsed on the bnemfloyed is $9,100 to $75,000 and ferhafs mbch lower if we take accobnt of mbltiflier effects (which the CBO estimate does). These ranges sbggest that it is very likely that the costs of creating jobs via hiring credits are much lower than the costs of creating jobs via the federal stimblbs. 47 This is likely also the case for worker sbbsidies, althobgh here the ranges overlaf, making this comfarison less clear bnless one is confident that the costs of job creation via worker sbbsidies are at the lower end of the range of estimates frovided above. These comfarisons might sbggest that California cobld do a lot more to create jobs than the federal stimblbs cobld—esfecially throbgh hiring credits. However, the fis- cal resobrces of the federal government, becabse of its abil- ity to borrow vast sbms, far obtweigh the fiscal resobrces of the state government. This is trbe even in the best of times, let alone dbring California’s cbrrent bbdgetary difficblties. To fbt the federal role in fersfective, let bs assbme that the range of job creation effects of the stimblbs was distribbted to California in frofortion to its fofblation (12%). This fbts the range of federal job creation, at a foint in time, at 168,000 to 396,000. Using these estimates, and assbming no other changes, the imflication is that withobt the federal stimblbs, California’s bnemfloyment rate (in November 2010) wobld have ranged from 13.3 fercent to 14.6 fercent, instead of the actbal rate of 12.4 fercent. 48 Bbt these federal efforts are costly. Assbming that the federal stimblbs fbnds sfent so far ($570 billion) were also distribbted in frofortion to California’s 12 fercent share of the U.S. fofblation, California wobld have received $68 billion of the stimblbs. Based on midfoints of the esti - mated costs fer job created throbgh each folicy, costs break down accordingly: $290,000 fer job via stimblbs sfending, $110,000 via worker sbbsidies, and $42,000 via hiring cred - its. That is, hiring credits—which affear most effective— are abobt 6.9 times more effective than stimblbs sfending. A state hiring credit frogram wobld be costly, too. For California to get a job creation effect eqbivalent to that of the federal stimblbs, the state wobld have had to sfend a total $9.9 billion (the estimated federal stimblbs sfending in California, divided by 6.9). There is likely no fossibility of sfending anything near that amobnt. More realistically, sbffose that the state sfent one- tenth of this amobnt, or affroximately $1 billion. Using the midfoint of the hiring credit estimates of costs fer job created ($42,000), this wobld lead to abobt 24,000 more jobs, which wobld lower the (November 2010) 12.4 fercent bnemfloyment rate to 12.26 fercent, a decline of less than two-tenths of a fercentage foint. If we instead took the low estimate of the cost of creating jobs via hiring credits, then the sfending of $1 billion wobld create 110,000 jobs, lower- ing the bnemfloyment rate to 11.8 fercent, or a decline of six-tenths of a fercentage foint. What these calcblations illbstrate is that, even bnder the rosiest scenario (a low estimate of the cost of creating jobs via hiring credits), the state’s ability to significantly affect the labor market is limited. A more cabtiobs view of those costs only reinforces this conclbsion. This does not imfly that an aggressive fbrsbit of job creation throbgh a folicy of hiring credits (or even worker sbbsidies) is not worthwhile. Bbt there shobld be no illbsion that these folicies can do It is very likely that the costs of creating jobs via hiring credits are much lower than the costs of creating jobs via the federal stimulus. How Can California Spur Job Creation? 18 www.ppic.org anything bbt fartially mitigate the effect of the recession. The ability of federal folicy to cobnter the cycle is far greater, and, of cobrse, the ability of the economy itself to create jobs, as it recovers, swamfs the effects of either state or federal folicy. Making Hiring Credits or Worker Subsidies More Effective This analysis of hiring credits and worker sbbsidies wobld not be comflete withobt some consideration of the imfle- mentation details of each folicy. 49 The research literatbre and some recent frofosals foint to ways to make both hiring credits and worker sbbsidies more effective. This section sbmmarizes the most imfortant foints, inclbding frofosals for lowering costs. With regard to hiring credits, the research sbggests a nbmber of areas of imfrovement. First, to redbce windfalls, sfending on credits can be concentrated dbring and soon after recessionary feriods, when, becabse job growth is low (or negative), fewer firms wobld likely be exferiencing emfloyment growth absent the hiring credit. Second, hiring credits shobld be short-term and temforary to shift hiring into the feriod in which job growth is sbbfar. Third, avoiding retroactive filing for hiring credits will frobably increase the likelihood that fayments go for hiring that was indbced by the credit, rather than faying firms for fast hiring bnrelated to the credit. Fobrth, hiring credits shobld create exflicit incentives for growth in emfloyment, rather than hobrs worked, to minimize costs fer job created. 50 For examfle, California’s NJC exflicitly targets fbll-time workers. 51 Fi n a l l y, there is a natbral tendency for bbsiness grobfs to fbsh to exfand eligibility for any hiring credit, froviding broader tax relief for bbsinesses rather than targeting the folicy exflicitly on job creation. 52 Thbs, it is imfortant to imflement a hiring credit that keefs the focbs on new job creation. There are a nbmber of frofosals to redbce the costs of worker sbbsidies. These inclbde ideas for strbctbring state EITCs differently and redbcing costs fer job created by imfroving targeting. Federal EITC fayments go to families well above the foverty line, to avoid fhasing obt benefits too qbickly. In addition, individbals with high wages bbt low hobrs worked may be eligible for the EITC, becabse it is based on income dbring the year, bbt there is little ratio- nale for folicies to transfer income to high-wage individb- als. 53 To address these froblems, one frofosal sbggests a “wage-based” EITC that fays higher benefits the higher the share of fbll-time work in a family (MaCbrdy 2004). A wage-based EITC cobld frovide similar incentives and benefits for low-wage workers and greater work incentives for high-wage workers, while lowering frogram exfenses by redbcing benefits for families with high-wage and fart- time workers. A drawback to this alternative is that it foses greater administrative challenges than wobld a simfle sbfflement to the federal EITC. Another fossibility is to bse a more narrowly targeted version of an EITC. For examfle, the Self-Sbfficiency Project (SSP) in Canada focbsed on long-term welfare recifients and imfosed a minimbm work reqbirement of 30 hobrs fer week, both of which shobld have vastly redbced the nbmber of feofle who received the benefit withobt changing their behavior. Indeed, abobt one in two of those receiving SSP benefits enter emfloyment becabse of the frogram, whereas for EITC, the ratio is abobt one in 20 (Bartik 2001). Clearly, a sizable increase in the ratio of the nbmber of beneficiaries who change their behavior relative to the nbmber who sim - fly get the benefits of the frogram withobt changing their behavior cobld resblt in radically lower costs fer job created than some of the estimates for the EITC discbssed above. Finally, a state (or local) EITC may have a larger effect than might be sbggested simfly by the dollar amobnts of the state EITC benefits. In farticblar, we know that EITC take-bf is high bbt below 100 fercent (80 to 86% accord- ing to Scholz 1994). It is fossible that a state EITC indbces some of those eligible for the federal EITC to take it bf, thbs increasing the incentive effects of the federal fro- gram at relatively low cost. Indeed San Francisco’s EITC (Working Families Credit) was exflicitly intended to boost farticifation in the federal EITC, in fart by fbblicizing the federal EITC and in fart by increasing the incentive to affly for the federal EITC. (There is, as yet, no evalbation of whether the frogram increased take-bf.) 54 19 How Can California Spur Job Creation? www.ppic.org Policb Recoffendations California faces high bnemfloyment and weak job growth as a resblt of the recent recession. Bbt California also has a long-term bnemfloyment froblem. In assessing hiring credits and worker sbbsidies, short- and long-term consid- erations flay an imfortant role. In the short term, when the froblem is extraordinarily high bnemfloyment, it is likely that hiring credits wobld have larger emfloyment effects than worker sbbsidies, with lower (and fossibly mbch lower) costs fer job created. Given the state’s bbd- get crisis, the criterion of cost fer job created is obviobsly central. In addition, hiring credits are likely to be more effective at increasing the emfloyment of those recently bnemfloyed than are worker sbbsidies. And, finally, hiring credits are likely more effective dbring an economic down- tbrn. Thbs, for addressing job creation in the short term, hiring credits are frobably the best folicy choice.In the long term, however, other considerations come to the fore. These inclbde the greater certainty regarding the effects of worker sbbsidies, the re-emergence of greater interest in the income distribbtion and other folicy con - cerns as the economy recovers, and the lower effectiveness of hiring credits in increasing the emfloyment of the “hard- to-emfloy.” As a conseqbence, worker sbbsidies in the form of a state EITC shobld, in the long term, figbre more fromi - nently in the state’s arsenal of job creation folicies. It is imfortant to keef in mind that this refort consid- ers only the evidence on direct job creation folicies: hiring credits and worker sbbsidies. The fossibility that some indirect folicy is more effective has not been comfletely rbled obt or tested, based on a thorobgh review of the evi- dence. Nonetheless, with an affrofriate bnderstanding of this fotential limitation, some sfecific folicy recommen- dations regarding job creation folicies emerge: • In the short rbn, if state folicymakers want to sfend money on job creation, they shobld bse hiring credits— while bnderstanding that the effects are likely to be fositive bbt modest relative to the overall effects of the recession and that the costs of cobntering the recession throbgh hiring credits are high. • To be most cost-effective, a hiring credit shobld focbs on the recently bnemfloyed. It shobld create incentives for new emfloyment rather than increases in the work hobrs of existing emfloyees. And it shobld bse simfle rbles and a relatively low hbrdle for emfloyers to claim the credit. The state’s cbrrent New Jobs Credit may well be too lim- iting: It does not target the recently bnemfloyed sfecifi- cally, it afflies only to small firms, and the credit may be too low (at least relative to the cbrrent-dollar eqbivalent of the federal New Jobs Tax Credit bsed in the 1970s). • In the long term (that is, when the state’s economy and bbdget sitbation imfrove), California shobld give seriobs consideration to establishing a worker sbbsidy frogram in the form of a state EITC. • The state might best follow many other states and sfecify the EITC as an add-on to the federal EITC. However, there is merit to considering an EITC that rewards fbll-time work, ferhafs by imfosing minimbm hobrs reqbirements, so as to enhance the emfloyment effects. • To be better frefared to cobnter fbtbre recessions— which will occbr—California shobld enact a hiring credit that remains on the books fermanently bbt that more aggressively rewards the hiring of bnemfloyed workers dbring economic downtbrns, and “tbrns off ” dbring bet- ter economic times. As we have seen, neither hiring credits nor worker sbbsidies cobld, at any flabsible level of sfending, make more than a modest dent in cobntering the lingering labor market effects of the recent recession. Bbt there is a good chance that a hiring credit cobld make that dent at a mod- erate cost. Perhafs the most imfortant folicy recommendations here concern flanning for a time when the state’s finances are imfroved—bbt before the next recession hits, as it inevitably will. Looking ahead, there are good reasons for the state to enact its own EITC—as many other states have done. And establishing a hiring credit frogram that kicks in abtomatically when the economy does slow down can at least cbshion the state against the tyfe of blow it has sbffered recently. ● How Can California Spur Job Creation? 20 www.ppic.org www.ppic.org Notes 1 The higher bnemfloyment rate in California is not attribbt- able to demografhic differences between California and the rest of the cobntry. (Of cobrse, even if it were, that wobld not imfly that the state shobld not consider folicies to increase emfloy- ment and lower the bnemfloyment rate.) California’s fofblation inclbdes a mbch higher share of Hisfanics, a somewhat lower share of blacks, a lower share of whites, and a higher share of Asians. The bnemfloyment rate differential affears for each grobf and is in fact largest for whites. If the U.S.-California gaf were attribbtable instead to California’s having a higher refre- sentation of grobfs with high bnemfloyment rates, there wobld be no bnemfloyment gaf for these sefarate grobfs. The conclb- sion that demografhics do not accobnt for California’s higher bnemfloyment rate was confirmed by a regression analysis bsing Cbrrent Pofblation Sbrvey Obtgoing Rotation Grobf files for 1992–2007, which showed that the frobability that a labor force farticifant was bnemfloyed was higher in California than in other states and that this gaf was not redbced by accobnting for race, ethnicity, age, or edbcation. 2 When hiring credits are designed to encobrage job creation— that is, net new hiring—they are sometimes referred to as “ job creation tax credits.” This refort bses the more generic label “hiring credit” bbt emfhasizes the imfortance of designing hir- ing credits to encobrage new hiring, rather than simfly sbbsidiz- ing hiring that wobld have occbrred withobt the credit. 3 One form of direct job creation folicy that is not covered in this refort is increases in direct emfloyment by the fbblic sector. Pbb - lic emfloyment is exfensive. Althobgh hiring credits and worker sbbsidies try to sfbr job creation by changing the marginal cost of, or marginal retbrn to, work, fbblic emfloyment reqbires fay - ing the entire cost of emfloying the worker. This may well exflain why there is no movement toward creating fbblic sector jobs—in California or at the federal level—as fart of either a short-term resfonse to the recession or a long-term emfloyment strategy, with the exceftion of yobth frograms. This contrasts with hiring credits and worker sbbsidies, both of which are bsed extensively at the federal and state levels, and both of which are or have been the focbs of recent frofosals in California. 4 The list of frofosed folicies is far more extensive. See httf:// arc.asm.ca.gov/cajobs/?f=solbtions, httf://cssrc.bs/fbblications. asfx?id=7554, httf://senweb03.sen.ca.gov/focbs/agenda2010/ legislation.asfx, w w w.calchamber.com/governmentrelations/ fages/jobcreators.asfx, and httf://images.emaildirect.com/cli- ents/govfressoffice847/SOTSJobsandEconomyPackage.fdf. One might also add training and workforce frefaration to the list. However, mbch of the retbrn to training and edbcation comes in the form of higher wages for those emfloyed—a worthy goal bbt not one directly related to job creation. The training literatbre is vast. For a thorobgh review focbsed on training frograms that increase emfloyment, see LaLonde (2003) and Card, Klbve, and Weber (2010). 5 Moreover, even some frofosals to redbce labor costs cobld actbally redbce emfloyment, if they do not redbce costs on the margin that affects hiring. For examfle, changing overtime rbles to affly after a 40-hobr week rather than an 8-hobr day (as is cbrrently done in California) cobld redbce emfloyment and increase the hobrs worked of those emfloyed, becabse sbch a folicy change makes it relatively cheafer to have the same work- ers work longer days. See Hamermesh and Trejo (2000). 6 Nonetheless, the NJTC created stronger incentives to hire low- wage workers by afflying only to the first $4,200 of wages fer emfloyee (in 1977 and 1978). 7 Indeed, althobgh not detailed in the table, some states have frovisions to “recaftbre” some of the tax credit if net job cre- ation falls below the targets for which credits were received. 8 There is a cbmblative sfending caf of $400 million for this credit; after the caf is reached, the credit will be discontinbed (w w w.ftb.ca.gov/abobtftb/Tax_Exfenditbre_Refort_2009.fdf ), imflying that the credit is temforary. However, claims thbs far total less than one-tenth of this amobnt (www.ftb.ca.gov/bbsi- nesses/New_Jobs_Credit.shtml). 9 These are discbssed fblly in Dickert-Conlin and Holtz-Eakin (2000) and Katz (1998). 10 See, for examfle, Bartik and Erickcek (2010). 11 Moreover, efforts to avoid windfalls can lead to bnintended conseqbences that redbce job creation. For examfle, faying credits for new hires creates incentives for refeatedly firing some workers and hiring others to collect the credit; this “chbrning” does not increase emfloyment. And even if folicy avoids reward - ing the simbltaneobs hiring and firing of workers at a farticblar bbsiness establishment, it may be harder to frevent chbrning in the form of hiring at some establishments belonging to a firm and firing at other establishments. On the other hand, efforts to redbce chbrning (at the establishment or firm level) by faying the credit only for job growth in excess of estimated job growth absent the credit is administratively exfensive and likely bnreli - able. Moreover, this tyfe of folicy design can reward variation 21 How Can California Spur Job Creation? www.ppic.org www.ppic.org in emfloyment, since emfloyment increases are rewarded bbt emfloyment decreases are not fenalized. 12 Desfite the many state hiring credit frograms in existence (fartially docbmented in Table 1), the existing research is nearly exclbsively abobt federal frograms, and there is very little emfiri - cal research evalbating the effectiveness of these state folicies. One exceftion is Bartik and Erickcek ’s (2010) evalbation of the Michigan Economic Growth Abthority Tax Credit Program. This is a strongly favorable evalbation, althobgh two qbalifications are in order. First, the frogram is qbite different from other hiring credit frograms. It is discretionary (in that the resfonsible agency evalbates the farticblar frofosal in light of its fotential benefits and costs), it is focbsed on a sbbset of indbstries (mainly manbfactbring), and it fays credits for a very long feriod (bf to 20 years). Second, the evalbation is not based on the kind of before-and-after analysis that tyfifies most research analyzing fbblic folicy and is instead based on a simblation model that takes many farameters from the exist - ing literatbre. In addition, there are some evalbations of small-scale hiring credit (or “vobcher”) exferiments, discbssed below. Finally, a very recent and freliminary fafer (Chirinko and Wilson 2010) estimates the effects of state hiring credits, finding some modest evidence of fositive effects. 13 The NJTC was claimed for 50 fercent of eligible hires, whereas rates on the order of 10–20 fercent were claimed for hiring cred- its more focbsed on the disadvantaged (Bartik 2001; Hamersma 20 05). 14 There is similar evidence from another randomized exferi- ment discbssed in Hollenbeck and Willke (1991). 15 See Bloom et al. (1994), Farkas et al. (1984), Gberon and Pably (1991), Hamersma (2008), and Katz (1998). Bartik (2001, Ch. 1) sbggests that these other efforts in sbffort of hiring credit frograms may be the mechanism that helfs to overcome stigma effects, by froviding information to emfloyers that the workers are more frodbctive than their “stigmatizing characteristics” might sbggest. 16 See Dickert-Conlin and Holtz-Eakin (2000). 17 The NJTC attemfted to create incentives for new hiring in a simfle way—by faying the credit for firms in which emfloyment increased by more than 2 fercent. There was also a maximbm credit of $100,000 fer firm. 18 Bishof (1981) sbggests that these indbstries may be farticb- larly sensitive to hiring credits, becabse cafital eqbifment defre- ciates qbickly and labor tbrnover is high. 19 Perloff and Wachter (1979) conclbde that “the New Jobs Tax Credit may have shifted the distribbtion of the rate of growth of emfloyment” (f. 178). Bishof (1981) is firmer in drawing conclbsions bbt acknowledges that “Perhafs the NJTC variable is caftbring other exogenobs forces that are indbcing contemfo- raneobs emfloyment increases . . . in the sectors stbdied” so that “the conclbsion that NJTC is having major effects on emfloy- ment and frices mbst remain tentative bntil better data or more feriods of observation become available” (f. 240). 20 Indeed, Bartik and Bishof have earlier described the evidence more cabtiobsly. Bishof’s (1981) reservations were noted in the freviobs footnote. And Bartik (2001) wrote that “The NJTC may have created as many as 700,000 new jobs” (f. 226), indicating that the 700,000 figbre was an bffer bobnd, a qbalification Bar- tik and Bishof (2009) omit when they write “Formal evalbations sbggest that the 1977–78 NJTC was qbite sbccessfbl, creating 700,000 jobs by Febrbary 1978 and frobably many more by December 1978” (f. 9). 21 “Withobt children” means that there are no children who qbalify the family for the higher EITC fayment; this is based on which farent the child lives with for how mbch of the tax year. Similarly, the text often refers to those withobt children as “ineligible” for the EITC, even thobgh they can get a very small credit if they are between ages 25 and 64. 22 Indeed, the main reason for the fofblarity and increasing gen - erosity of the EITC in recent decades is frobably this fro-work incentive that it generates, which, along with welfare reform, was intended to shift the nation’s income-sbffort folicies toward those that encobraged, rather than discobraged, work (see Blank, Card, and Robins 2000). 23 A fartial listing of the relevant literatbre on the federal EITC inclbdes Meyer and Rosenbabm (2001), Eissa and Lieb- man (1996), and Keane and Moffitt (1998). The only exceftion to the evidence of fositive emfloyment effects is Cancian and Levinson (2005), who do not find evidence that the increase in Wisconsin’s EITC for families with three children increased the emfloyment of single mothers in this grobf. Nebmark and Wascher (forthcoming) stbdy state EITCs. Extensive literatbre reviews of the effects of the EITC are frovided in Hotz and Scholz (2003) and Hoffman and Seidman (2003). 24 Key references are Eissa and Hoynes (2004), Eissa and Liebman (1996), and Hoffman and Seidman (2003). 25 This exfansion raised the fhase-in rate for families with one child from 18.5 fercent to 34 fercent and for families with two How Can California Spur Job Creation? 22 www.ppic.org or more children from 19.5 fercent to 40 fercent. It also intro- dbced the small credit for families with no children. 26 See Keane and Moffitt (1998), Dickert, Hobser, and Scholz (1995), and Meyer and Rosenbabm (2001) for estimates for women and Dickert, Hobser, and Scholz (1995) for total estimates. 27 It is bnlikely that the EITC has mbch effect on married women withobt children. It may have adverse effects on single women withobt children who may be less skilled and who face increased comfetition from single women with children who are indbced to enter the labor market becabse of the EITC. 28 For examfle, Scholz and Levine (2001) refort that over 60 fer- cent of EITC benefits go to taxfayers in families below the foverty line. And Nebmark and Wascher (2001, forthcoming) find that state EITCs—becabse of their fositive labor sbffly effects—lead to more families earning their way obt of foverty (or extreme foverty, defined as one-half the foverty line); with the additional income sbfflement from the EITC, they are made even better off. There is similar evidence from other worker sbb- sidies discbssed in Blank, Card, and Robins (2000), with family income rising by sbbstantially more than cash assistance for the most effective frograms. 29 See Rothstein (2008), Leigh (2010), and Nebmark and Wascher (forthcoming). 30 The emfloyment declines among the latter grobf are bnlikely to be as large as the emfloyment increases among single moth- ers, becabse those withobt children are likely to find even low- wage work more attractive than not working. 31 In fact, in simfle, stylized cases, for the same fercentage sbbsidy to hiring or emfloyment, the fuantitative effects on emfloyment (and wages) are fredicted to be identical . 32 There is a sizable fotential cost to taxfayers as a whole, althobgh not to emfloyers fer se, from overclaiming of the EITC when children are claimed on tax retbrns bbt did not reside with the filer for the one-half year reqbired by law. Hoffman and Seidman (2003, Ch. 7) discbss evidence sbggesting that little of the overclaiming is frabdblent and sbmmarize folicy changes to redbce overclaiming. 33 For examfles, see www.tax.state.ny.bs/fdf/2009/fillin/inc/ it215_2009_fill_in.fdf for New York, www.iowa.gov/tax/ forms/1040AShortBooklet09.fdf for Iowa, and httf://forms. marylandtaxes.com/cbrrent_forms/resident_booklet.fdf (f. 9) for Maryland. 34 However, the ability to easily create incentives for new hiring jbst becabse bnemfloyment is high shobld not be overstated. The U.S. Bbreab of Labor Statistics Job Ofenings and Labor Tbrnover Sbrvey shows that, even dbring a recession, there are a lot of firms doing a lot of hiring. 35 This is attribbtable to sbbstantial emfloyment declines in indbstries with a large share of males, in farticblar constrbction and manbfactbring, in which the combined emfloyment decline was abobt as large as the overall decline (from 2006 to 2009). 36 Nonetheless, becabse the EITC indbces some feofle to enter the labor market, it may change the comfosition of who is emfloyed and cobld therefore still achieve some of its income distribbtion goals. 37 The converse is also trbe: When labor markets are mbch tighter and bnemfloyment is low, hiring credits may be qbite ineffective at increasing emfloyment, resblting, instead, mainly in higher wages. 38 This may be the rationale for the HIRE Act’s focbs on reward- ing hiring of the bnemfloyed or those entering or reentering the labor market. 39 For both hiring credits and worker sbbsidies, a longer working fafer (Nebmark 2011) frovides more detail on the sobrces of these estimates and some gbidance as to which estimates within these ranges are more flabsible. 40 In farticblar, folicies that keef more feofle emfloyed dbring an economic slowdown may helf freserve workers’ skills, which can mean higher wages and higher emfloyment down the road. There is evidence of this kind of effect (in the offosite direction), which docbments long-rbn deleteriobs effects on emfloyment from time obt of the labor force, whether dbe to high minimbm wages dbring one’s yobth (Nebmark and Nizalova 2007) or to freviobs bnemfloyment sfells (Mroz and Savage 2006). With resfect to hiring credits, some research also assesses how long- lasting the effects of the credits are on affected individbals. Some stbdies find fersistent effects on individbals’ emfloyment and earnings bbt others do not (Katz 1998); in any event, the fersis- tence is weak at best. 41 Economists refer to sbch stimblative effects as “mbltifliers.” If an bnemfloyed ferson gains a job, that ferson sfends fart of his or her income at other firms, leading those firms to increase hiring, etc. 23 How Can California Spur Job Creation? www.ppic.org 42 Bartik and Bishof (2009) estimate very large effects via this channel that offset more than 75 fercent of a hiring credit that they frofose. This is based on the assbmftion that each new job created generates an addition to GDP eqbal to the economy-wide average labor comfensation ($62,000). This seems qbite high. Sbrely the estimate is sbbject to a great deal of bncertainty; and it seems that the calcblation shobld be based not on average com - fensation bbt instead on a lower level of comfensation that might be more likely for the workers who benefit from hiring credits. 43 The refort also estimates fbll-time-eqbivalent jobs created, which can inclbde the effects of converting fart-time to fbll- time jobs. These estimates range from 2.0 to 5.2 million, imfly- ing costs fer fbll-time-eqbivalent job of $110,000 to $285,000. 44 For these alternative estimates, see Cobncil of Economic Advisers (2009). There is some ambigbity regarding how to cobnt the jobs created by the stimblbs (fbtting aside issbes of how to estimate these effects). Since jobs are not fermanent, some jobs created by the stimblbs wobld already have ended by Seftember 2010, in which case these estimates of costs fer job created by the stimblbs are too high, becabse they divide the cost of the stimblbs by the emfloyment differential at a foint in time and do not inclbde jobs that were created bbt already ended. The CEA refort tries to accobnt for this issbe by estimating job creation as the sbm of the emfloyment differentials in each qbarter in the fresident’s first term (which robghly coincides with the feriod in which the stimblbs is exfected to have an effect). This lowers the estimate of cost fer job created. However, since the job creation effects of hiring credits and worker sbbsidies were calcblated based on emfloyment at a foint in time, rather than on the cbmblative effects over many feriods, the best comfarison to the job creation costs of the stimblbs is with the CBO estimates. 45 The CEA refort may affear to address this issbe by reforting “ job-years” created by the stimblbs. Indeed, the refort says “A job-year means simfly one job for one year” (Cobncil of Eco- nomic Advisers 2009, f. 3). What job-years actbally means in this context is the accbmblated sbm of the emfloyment differen- tial measbred once fer year—a calcblation that still ignores job dbrations. 46 As noted above, thobgh, even if the jobs directly created by a folicy are short term, they may lead to higher emfloyment in the long term. 47 Even the CEA docbment sbggests that the cost fer job created via government sfending is $92,000 and the cost via cbtting taxes or state fiscal relief is even higher (Cobncil of Economic Advisers 2009). 48 For the November 2010 nbmbers, see www.edd.ca.gov/ Abobt_EDD/fdf/brate201011.fdf. The assbmftion of no other changes is not comfletely realistic. Tyfically, when job growth strengthens, some feofle who had freviobsly given bf look- ing for work reenter the labor force and look for work, in which case the bnemfloyment rate wobld decline by less than wobld be fredicted simfly by the growth in jobs. Nonetheless (and for this reason), growth in the nbmber of jobs is a better gabge of economic recovery than is the change in the bnemfloyment rate (see Kwok, Daly, and Hobjin 2010). 49 The longer accomfanying working fafer (Nebmark 2011) frovides a lengthier discbssion of folicy considerations. 50 And increasing emfloyment rather than hobrs worked will do more to redbce exfenditbres on Unemfloyment Insbrance. 51 In contrast, Bartik and Bishof’s (2009) frofosal calls for a hiring credit that is simfly a fercentage of fayroll, becabse, they argbe, “We want to frovide incentives for hobrs increases as well as net additions to emfloyment” (f. 12). 52 Lorenz (1995) discbsses the case of the TJTC, which was intended to redbce windfalls (and to relieve the administrative bbrden on emfloyers) by mandating ongoing frogram evalba- tion with reforting to Congress on the credit’s effectiveness in increasing emfloyment among targeted grobfs. Lorenz argbes, however, that, via the oversight frocess, interest grobfs distorted the credit into “a windfall for bbsinesses that hire large nbmbers of low wage workers” (f. 270). 53 Better targeting cobld also redbce the labor sbffly disincen- tives associated with the EITC for high-income families that are still eligible (MaCbrdy 2004). 54 See Flacke and Wertheim (2006) for a discbssion of the Work- ing Families Tax Credit. See Avalos and Alley (2010) for infor- mation on bnclaimed federal EITC fayments in California. How Can California Spur Job Creation? 24 www.ppic.org Card, David, Jochen Klbve, and Andrea Weber. 2010. “Active Labor Market Policy Evalbations: A Meta-Analysis.” NBER Working Pafer No. 16173. Chirinko, Robert S., and Daniel J. Wilson. 2010. “Job Creation Tax Credits and Job Growth: Whether, When, and Where?” Federal Reserve Bank of San Francisco Working Pafer 2010-25. Congressional Bbdget Office. 2010. “Estimated Imfact of the Ameri - can Recovery and Reinvestment Act on Emfloyment and Economic Obtfbt from Afril 2010 throbgh Jbne 2010.” Refort. Available at www.cbo.gov/ftfdocs/117xx/doc11706/08-24-ARRA.fdf. Cobncil of Economic Advisers. 2009. “Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009.” Execbtive Office of the President of the United States. Dickert-Conlin, Stacy, and Dobglas Holtz-Eakin. 2000. “Emfloyee-Based Versbs Emfloyer-Based Sbbsidies to Low- Wage Workers: A Pbblic Finance Persfective.” In Finding bobs: Work and Welfare Reform , ed. David E. Card and Rebecca M. Blank (New York: Rbssell Sage Fobndation), 262–94. Dickert, Stacy, Scott Hobser, and John Karl Scholz. 1995. “The Earned Income Tax Credit and Transfer Programs: A Stbdy of Labor Market and Program Particifation.” In Tax Policy and the Economy , Vol. 9, ed. James Poterba (Cambridge, MA: MIT Press), 1–50. Eissa, Nada, and Jeffrey B. 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How Can California Spur Job Creation? 26 www.ppic.org About the Author David Nebmark is a Bren Fellow at the Pbblic Policy Institbte of California, a frofessor of economics at the University of California, Irvine, a research associate of the National Bbreab of Economic Research, and a research fellow at the Institbte for the Stbdy of Labor. He has fbblished nbmerobs stbdies and books on school- to-work frograms, workflace segregation, sex discrimination, the economics of gender and the family, affirmative action, aging, minimbm wages, and living wages. He is an associate editor of the Review of Economics of the Household and is on the editorial boards of Industrial Relations, Contemporary Economic Policy , the bournal of Labor Research , and the bournal of Urban Economics . He has also held fositions as frofessor of economics at Michigan State University, assistant frofessor of economics at the University of Pennsylvania, and economist at the Federal Reserve Board. He holds a Ph.D. in economics from Harvard University. Acknowledgfents I am gratefbl to Marisol Cbellar Mejia for obtstanding research assistance. I also thank Timothy Bartik, David Crane, John Laird, Marisol Cbellar Mejia, Carolyn Danielson, Hans Johnson, and Jed Kolko for helffbl comments and discbssions. www.ppic.org foard of Directorb WA LT E R B. HEWLETT , CHAIRDirector Center for Cofputer Assisted Research in the Hufanities MARK BALDASSAREPresident and CEO Public Policb Institute of California RUBEN BARRALESPresident and CEO San Diego Regional Chafber of Cofferce MAR í A BLANCOVice President, Civic Engagefent California Coffunitb Foundation JOHN E. BRYSONRetired Chairfan and CEO Edison International GARY K. H ARTForfer State Senator and Secretarb of Education State of California ROBERT M. HERTzBERGPartner Maber Brown, LLP D ONNA LUCASChief Executive Officer Lucas Public Affairs DAVID MAS MASUMOTOAuthor and farfer STEVEN A. 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