Saturday, March 6, 2010

Jobs and the Jobs Bill (304,000 jobs over the next 12 months)

The economy lost an additional 36,000 jobs in February.  Interpreting the numbers is difficult because of the record breaking snow storm on the East coast during the reference period for the establishment survey.  Almost every analyst I heard on topic predicted that the storm subtracted anywhere from 30 to 80 thousand jobs from the labor report.  

It’s amazing how confident people are in their statements.  They might be right but I am less sure.  Keith Hall, the Labor Commissioner and one of the most forthright people around, said that, while it was likely the storm had a substantial impact on the jobs report, it was not possible to tell whether the jobs number was biased upwards or down as a result.  He did not know how much the storm effected the hiring and firing decisions of firms nor did he know how much the storm impacted temporary hiring, as businesses and schools hired temporary workers to help remove the snow—temporary help rose 48,000 in February.

I think there is a more general issue.  The storm effectively shut down firms in the mid-Atlantic region for a full week in February.  It seems to me that the first order effect of the storm depends on whether the impacted firms would have hired or fired in that week.  For some companies, the storm may have served as a temporary furlough, pushing back firings and perhaps delaying them indefinitely.  For others, the storm may have prevented them from hiring.  The net effect depends on the aggregate state of hiring and firing.  I don’t know the answer and neither does anybody else. 

The Jobs Bill:  Adding 230 to 370 thousand new jobs

For those of you who are regular readers, you know my opinion of economic stimulus:  I am not a believer in big multipliers.  But I like the jobs bill.  If you want to increase employment this bill is exactly the right medicine.  I suggest exactly this program in December 2008 (here scroll down to “What can the government do?”)  My plan went farther, in line with spending almost $1 trillion, but the incentives are the same.

The jobs bill works on the margin.  New hires are exempt from the firm’s share of social security plus the firm receives and additional thousand dollars if the employee is kept on the payroll for 1 year.  For the average worker in the United States, this is a $3,600 payment per qualifying hire.  The maximum payment is close to twice that. 

This is not enough money to change the hiring decision of the average firm; fortunately, economics does not work on the average; it works on the margin.  Because the jobs bill is only allocates between $12 and $15 billion, the bill is perfectly designed to work on the margin. 

I estimate that the jobs bill (the employment portion only) will add between 230 and 370 thousand jobs over the next year.  These jobs are new additional jobs in the United States. 

Why is the jobs bill effective and ordinary stimulus not?  Because the jobs bill changes the real relative price of labor.  (Stimulus does too but with the wrong sign.)  Labor demand curves are downward sloping:  cheaper equals more.  The jobs bill is just like Cash-for-Clunkers and the Home Buyer’s Credit.  The change in real relative prices induces a real change in demand.  [Note, this does not necessarily boost GDP; it is only expected to change the demand for the particular product.  The bills have costs.]

1 comment:

NorthGG said...

Visually, the relationship between the steepness of the yield curve and the percentage of total workers that are from the private sector seem related. Statisically, I can't find a good relationship.

However, what it shows is that curve steepness peaks and flattens when private sector jobs increase its share of the overall workforce.

This has yet to happen despite the recession being over and the curve is on its wides.

If the governments share of workers rises through policies could there be a credit charge to the economy that you are not including?

Markets seemed more concerned about credit risk than inflation now. How much credit risk can the government afford to take?

As always, thanks for the post.