Saturday, 13 February 2010

Correction: the action is at the margin

Barbara Kiviat at Time writes about the jobs bill Harry Reid is trying to pass:
The bill would temporarily exempt employers from paying Social Security payroll taxes for new hires, and give a $1,000 tax credit for new workers kept at least a year. This type of move isn't really about creating jobs, but about accelerating those that would have been created anyway. (I've yet to find a businessperson yet who has said he or she would create a job out of thin air just to grab a tax break.)
Not right.

The point of tax breaks is to move the margin. Indeed, nobody will create a whole job just to get a $1000 tax break (let's say $3000 including the payroll taxes). But the case that matters is where the employer's gain from employing someone would have been $29,000 and the cost $30,000. A net loss, meaning no job. The subsidy changes the equation; the cost goes down to $27,000 - and suddenly it's worthwhile for the hire to take place.

What's more, the government will more than get its money back in new income taxes, meaning everyone wins. (Although there is a genuine cost to the government, which is the unnecessary subsidy it gives to other people who would have got jobs anyway).

Naturally most employers don't calculate things quite as clearly as that - there are error bounds and heuristics, and attitudes differ between one employer and another - but on balance, a job subsidy does enable people to be hired who would not otherwise be.

So while Barbara is correct that the policy might accelerate some hires (which is a good thing) it will also give jobs to some people who would never have got them. How strong the effect will be is an empirical question, but I'm sure there is data out there to indicate the likely impact.

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