TITLE: Policies to Encourage Job Creation: Hiring Credits vs. Worker Subsidies

AUTHOR: David Neumark

PAGES: 87     DATE: February 2011

ABSTRACT: This paper surveys existing research on two “direct” job creation policies: subsidies to employers to hire workers (“hiring credits”) and subsidies to individuals to enter the labor market (“worker subsidies”). Hiring credits have been used at both the state and federal level, with most programs – especially at the federal level – focusing on efforts to increase hiring of disadvantaged workers. Hiring credits that target disadvantaged workers have generally been ineffective. But evidence suggests that the more broadly-based New Jobs Tax Credit, a federal program enacted to speed economic recovery in the late 1970s, was more effective at creating jobs. The most prominent worker subsidy program is the federal Earned Income Tax Credit (EITC), which many states now supplement. The EITC clearly increases employment, and has beneficial distributional effects – especially in raising incomes of single women with children.

In the short-term, when recovery from the recent recession is the paramount goal, hiring credits are likely a more effective policy response, for three reasons. First, hiring credits are likely more cost effective, as long as they focus on the recently unemployed and create incentives for new job creation. Second, the distributional benefits of worker subsidies may be less important in the short-term, more so because the effects of the recent recession fell so strongly on men. And third, employment subsidies may not be as effective when there is high cyclical unemployment. In the longer-term, however, when the labor market has recovered more fully and the focus can shift to longer-standing employment problems and distributional concerns, greater reliance on worker subsidies – most likely in the form of a state EITC – would prove more beneficial.

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