IT Article on Job Subsidies Post author By Karl Whelan Post date June 12, 2009 Following on from my post last week on job subsidies, here‘s an article I wrote on the subject for today’s Irish Times. Categories In Fiscal Policy Tags Job Subsidies, Unemployment 10 Comments on IT Article on Job Subsidies ← How Many Regulatory Agencies Are There and What Does it Mean? → Raise the Last Glass 10 replies on “IT Article on Job Subsidies” Excellent piece that sums it all up on the employment issue. Unfortunately, it’s ingrained in our political culture that politicians must take responsibility for employment policy – blamed when there are increases in unemployment and personally inclined to take credit for any new job creation. They’re all stuck in that groove – even poor George Lee on his first day int he Dail. Apart from interventions to help the long term unemployed, surely there is also a case for jobs/training policies targeted at youth unemployment and, specifically, at third and fourth level graduates? In the 1980s most of these might have accessed employment opportunities abroad; but that’s no longer on the cards for them. I think there’s also an argument to be had on the education front – surely, at this time, it’s more important that ever to encourage as many school leavers as possible into third level and to ensure that education facilities and investment by the State are beefed up to this end? The short term benefit is to keep the youth employment ratio down; long term we end up reaping the benefits of a better educated population. Probably all wrong, but if I am, I’m sure you’ll tell me! Reading a recent posting on relative levels of productivity in Ireland and Germany, it seemed obvious to me that, because of the different cost of making someone redundant (mainly due to government regulations) in the two countries, multi-national companies operating in both countries will probably make workers in Ireland redundant before those in Germany even though the Irish worker may be more productive. Is this not something the government here could target? Germany is crticised for not providing a bigger stimulus package. In a system where unemployment benefits are high, it is supporting part-time work, in the expectation that companies can hold out until exports markets recover. http://www.finfacts.ie/irishfinancenews/article_1016019.shtml Maybe it is too early to assess the programme but the net cost is bearable as along as the recovery arrives soon. Karl Your articles raises two interesting questions: (1) If it is true that “the demand for workers from firms is not very responsive to wage rates”, as the research you cite suggests, why the consensus among the economics community that public and private sector wage cuts are necessary to restore competitiveness, protect jobs and battle unemployment? (2) Is there such a significant difference (asides from administration) between wage subsidies and cutting labour taxes? Would you argue that cutting labour-related taxes (income, levies, PRSI etc.) to protect competitiveness and jobs has significant deadweight costs because most of the jobs would have been maintained / created anyway? I think this would be an odd conclusion. This is because the starting position for our analysis of the impact of wage subsidies is not market equilibrium. Given that we already have significant labour taxes and that these taxes (as with most taxes except for taxes on “bads”) in themselves lead to distortions and sub-optimal equilibria, it can be argued that wage subsidies (labour tax cuts), offset by tax broadening in other areas (e.g. property), can improve welfare. Andrew Very good questions Andrew. I’m heading off for the day now but let give you my quick responses and I might write more (perhaps in a new post) later. 1. I am a little uncomfortable with the consensus that you refer to. Not because they’re wrong qualitatively. However, I would suggest that the positive employment effect right now of, for instance, an across the board cut in wages of 7.5% (everybody taking a public sector levy hit) would be very small. The adjustment process back to lower unemployment levels will partly come from wage restraint (which will be induced by the slack labour market, not yap from economists) but will mainly come from recovery in the world economy. 2. In terms of taxes on labour, even after the new levies, our income tax rates on low to medium earners are still very low by international standards. In the precarious fiscal position that we’re in, where all sorts of painful new taxes may have to introduced, I don’t think we can afford to throw away large amounts of tax revenues that we currently have. So, there you go, yes that really is my position. But thanks for the interesting and challenging comments, which I’ll mull over a bit more. Karl Thanks for your response. Interesting to hear a divergent view from the “deflate our way back to full employment” orthodoxy. I agree we’re in a bind on taxes generally, and must be very careful about any further hollowing out of the tax base. But my point is this: a part-reversal of a tax on labour (through a wage subsidy) is not the same as a subsidy applied to a free-market equilibrium (where all your arguments would rightly apply). If all public spending offers good value for money (i.e. national utility would not increase if it were replaced by private spending), and if we could replace a proportion of labour taxes (whether through wage subsidies or traditional tax cuts) with taxes in other areas (property, pollution etc.) that lead to less utility-reducing distortions, then we might be better off. Regards Andrew It may be worth noting that through the industrial development agencies we have a wide array of incentives that tend to be discretionary in contrast to a blanket subsidy. If a little self promotion is allowed the following paper evaluates these grant payments and find they pass benefit cost tests at reasonably low shadow wages. [Girma, Strobl and Walsh, in “Creating jobs through public subsidies:An empirical analysis” Labour Economics 2008, 1179-99] http://www.ucd.ie/research/people/economics/drfrankwalsh/publications/ By contrast the following evaluation of the employment incentive scheme (a 1980s scheme that seems to be similar to the Fine Gael proposal) shows that the subsidy led to a lot of employment churning but few additional jobs. Breen, Richard and Halpin, B. (1989), Subsidising Jobs: An Evaluation of the Employment Incentive Schemes, General Research Series 144, Economic and Social Research Institute, Dublin. @ Frank Thanks for this very useful analysis. At my own risk of self-promotion, combining survey data and grant data for software companies in the mid-1990s I found positive effects of grant aid on employment, export-intensity and product-intensity for indigenous software firms, controlling for initial employment levels. The more detailed analysis is in S. Ó Riain, 2004. The Politics of High Tech Growth (Cambridge UP), Chapter 5. It is interesting to see that the pattern extends across manufacturing and software, our main services export industry. As a proposition for long-term macroeconomic management, it is hard to disagree with Karl that the “best thing governments can do to induce economic growth, and thus increase employment, is to provide a stable economic environment that encourages long-term sustainable investments by businesses.” But short-run policy formulation can’t ignore that we are are in a deep recession characterised by deficient aggregate demand and credit-constrained businesses. In such circumstances, it is hard to deny a prima facie for stimulus policies. Of course, it is also well recognised in the debate that stimulus policies could make the situation worse through interest rate and expectations-related channels. There is also an argument for special caution given uncertainty about how the global situation will unfold and the irreversibility of a debt build up. So my point is certainly not that the case for stimulus is self evident. But I do agree with the thrust of Andrew’s comments that we should be debating creative policy approaches (e.g., combinations of permanent — possibly phased — deficit reduction measures combined with explicitly temporary stimulus measures.) A general but temporary cut in employer payroll taxes strikes me as worth considering. Without exaggerating the impact on severely cash- and profit-constrained businesses, it should help relieve working capital constraints. While Karl is right that a significant turnaround will only come with an international recovery, any reduction in wage costs would also help restore cost competitiveness. And any slowdown of individuals into unemployment will help sustain demand and limit what will be for many a long and painful disconnect from the labour market. I don’t want to exaggerate the difference between Karl and my views on this — I share his concern about deficits of the size we are running. But I see more scope for creative yet sensible policies in the context of a large output gap. […] an on-the-record sceptic about job subsidy policies, I found this piece by Paul Krugman interesting. In addition to […] Comments are closed.