A Handout for a Hand Up
January 19, 2015
To the pleasant surprise of nearly all business and policy leaders, the U.S. labor market continues to strengthen. Ten days ago the latest Employment Situation report revealed that in December America’s unemployment rate had fallen to just 5.6 percent—in the upper end of the range of most estimates of what constitutes “full employment” in the country. Total U.S. payroll employment rose by 2.95 million in 2014, the most since 1999.
Welcome though this healing is, America’s labor market remains far from robust. Wage growth remains too slow for too many (a critical topic about which we have written here). And too many people remain unmatched with the positions firms are seeking to fill. Last month nearly 3 million Americans remained unemployed for at least 27 weeks, with millions more so discouraged they have exited the labor force. Yet at the same time in November there were nearly 5 million unfilled job openings in the country.
Last week the Council on Foreign Relations published a new white paper, A Bipartisan Work Plan: Helping America to Work, that regards “This mismatch [as] a human disaster that should be solved with aggressive policy innovation and the same resolve and whatever-it-takes attitude that the United States applies to natural disasters.” Co-authored by one of us and former World Bank President Robert B. Zoellick, this paper calls on the new Congress to pursue a bipartisan jobs program focused on getting the long-term unemployed into private-sector jobs.
This jobs-policy overhaul, the paper argues, should be guided by four core principles.
“First, all government efforts should concentrate on getting people—especially the long-term unemployed—jobs, instead of setting wages or just paying for training … Government should help by removing barriers to work, such as overbearing, costly licensing requirements and constraints on job sharing …
Second, if wages for entry-level jobs are too low for a living, supplement them with direct add-ons, such as wage subsidies or an expanded earned income tax credit. It is better to get the unemployed working again than to pay people to wait or artificially boost wages …
Third, Congress should relax its rigid budget rules for programs that put people back to work. Innovations that return people to the workforce—such as relocation assistance for the long-term unemployed, transitional wage subsidies, and lump-sum unemployment payments—will increase overall economic output and generate new tax revenues that offset some of the costs …
Finally, taxpayers may be more willing to support public innovation if the government rigorously evaluates the results of new jobs programs and ends those that do not work. Accountability requires outcome measures, which are scarce in government. The Department of Labor currently spends only 0.1 percent of its employment-and-training budget on evaluation. The unemployed deserve access to what works rather than the perpetuation of programs that may not be effective.”
To put these four principles into practice, one of the paper’s tangible proposals is a temporary wage subsidy for employers who hire the long-term unemployed.
Granted to a hiring company, a wage subsidy would reduce the wage that company pays to a new employee. This lower effective wage would induce companies to hire more people than they otherwise would. Society would gain from this subsidy by avoiding future costs of continued long-term unemployment. And, it would harness the knowledge and incentives of the private sector. Private companies, not the government, would decide whom to hire.
What fiscal cost would this wage subsidy carry? Imagine it targeted half a million new jobs a year, about one sixth of today’s long-term unemployed. To induce hiring, the subsidy need not be large. In 2013, earnings of full-time, year-round workers averaged about $50,900 for men and $40,600 for women. Many long-term unemployed probably earned less than these averages before they lost work. Perhaps $10,000 per worker over the first 12 months of employment would be enough and then $5,000 more over the next 12 months. This hiring goal at these subsidies would carry a direct program cost of $5 billion its first year and $7.5 billion in years thereafter.
Yes, that’s real money. But these costs would be offset by gains from larger payroll-tax revenues and, over time, a larger labor force. With these dynamic benefits, the net annual cost of this wage subsidy would be a fraction of its direct cost—offset by substantial human gains, most of all in dignity for those keen to regain a meaningful job. Improving though America’s labor market is, millions still need a helping hand in it. Let’s give them some new ones.
Articles © 2014 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2014 Trustees of Dartmouth College. All rights reserved.