Job Subsidies and Stimulus

One point I had meant to make in yesterday’s post about job subsidies but forgot to was the following.  Beyond the fact that these programs are expensive and known to be ineffective at reducing unemployment, it remains the case that, whatever agreement the government comes to with the unions, the fiscal situation remains the same (I am discounting arguments here that these schemes pay for themselves because we know they don’t.) I doubt if the government will change its plans for the budget deficit by one cent if it adopts this plan.

So if we spend €250 million (or a €1 billion) on these schemes we will undoubtedly have to find a corresponding €250 million in tax increases or, more likely, spending cuts to offset them.  These measures will themselves have a negative effect on aggregate demand and thus unemployment.

This comes back to the point I made in my post on stimulus. In the current environment, spending measures like this need to be evaluated according to balanced-budget multipliers (i.e. factoring in the negative effects of the taxes that need to be raised or other spending that needs to be cut to pay for them.)  With so many difficult cuts in public spending ahead of us, why put ourselves deeper in the hole by adding an extra €250 million (€60 for every man, woman and child in the country) just to pay for a program that doesn’t help much.

15 thoughts on “Job Subsidies and Stimulus”

  1. job subsidies are a bad idea, rather than trying to solve unemployment instantly, we should instead (as suggested on every second page of the recent IMF report) address the public sector wage bill, that costs more than providing unemployment benefit.

    the only companies (and people) who will benefit from this are those that can abuse it the most, and it probably won’t fix the very thing it is intended to remedy.

    having said that, it will be really popular amongst unions and other political-stranglehold sections of the economy.

  2. Karl -Why would it, other than for political or status quo bias reasons, be a bad thing to transfer money out of the public sector and into the private sector? Again, I am not calling for this but as an objective voice, surely we need to take a neutral position on whether the public or private sector takes the pain. To frame it another way, in this case, I dont see immediately why it is better to take this billion euro from the private sector in the form of taxes and transfer it to the public sector rather than to simply leave it in the private sector and hope it might create some jobs there. I dont see why the public sector is more likely to create a jobs multiplier than the private sector. How can you say Karl that transferring this billion or so to the private sector will create almost no jobs whereas taking it from the public sector will reduce aggregate demand and increase unemployment? Do you mean that it will simply go into industry profits in the current proposal?

  3. @Liam

    Status quo bias is a good rhetorical debating term — congrats. However, lying behind it is the following reality.

    Public expenditure has to be cut. And this is rarely as easy as we would like it. Yes there is waste, but it can be damned hard to weed it out quickly and by then new inefficiencies have popped up — let’s see what the response is to An Bord Snip’s recommendations but I suspect it will be hysterical. And anyone who thinks we can make the cuts that are necessary without inflicting a lot of genuine pain on people is deluded. I know that you want to further cut public sector pay and that’s fine, I’m sure that will happen, but the figures don’t add up for that to be enough.

    Against that background, a decision that, in effect, would require us to find an extra billion in cuts of existing services can only be justified if we know that it’s a good effective policy. Research has shown that this kind of thing is not effective (I seem to recall a certain Institute being very into Evidence-Based policy …).

    On subsidies versus aggregate demand, I’m not saying that job subsidies have no effect but that reductions in aggregate demand do—that would indeed be inconsistent. I’m just saying that whatever limited employment benefit will come from this policy, we need to subtract off the negative effect that spending cuts elsewhere will have. There’s no point in adopting a partial equilibrium approach to this.

  4. Economically, this really is an open-and-shut case. Subsidies only make sense if they address an identifiable market failure.

    Companies that have been run badly and get into risk of shedding jobs in a recession do not represent a market failure. That is just the normal process of economic activity.

    There are, however, a number of ways in which the State can help to overcome informational assymetries and other market failures in the job market.

    Spending money on things like job exchanges (matching real workers to real jobs) makes more sense than paying failed companies to keep unproductive workers on their payrolls.

    But lowering the minimum wage is probably the best thing policymakers could do for the unemployed right now. As wages fall, the wage floor acts as an increasingly binding constraint on labour demand.

    A lower minimum wage could be tied to negative GDP growth, i.e lower it by x% in 2009.

  5. @brian lucey: i want less public sector it in the same fashion you want nationalisation! lol! 😉

    but the difference is this: The IMF report says time after time that we need to cut expenditure, specifically the public wage bill comes up a lot. it only talks about nationalisation once. ‘Less public sector’ has the advantage of utility above and beyond idealism.

    If there are going to be any subsidies I’d rather see them go towards retraining or education rather than spending € for the marginal benefit it might provide in this idea.

    @karl w: I’m in total agreement with you when looking at the benefit of cutting cost from somewhere else versus the resulting benefit of this idea.

    but it doesn’t change the need for cuts in expenditure in general.
    Is the aim to reduce expenditure as a whole, or weigh potential expenditure against existing spending on a benefits basis?

  6. If the financing of this scheme comes from spending cuts elsewhere then there is an opportunity cost to using the funds in this way – while the benefit at the margin of a scheme such as this is probably pretty low, it may not be the least productive element of public spending. On the other hand it is very unlikely to be the most productive – so if we want to reallocate spending to equalise social benefits at the margin there are probably better ways to do this. What would be really dangerous, and where the real deadweight loss would kick in, would be where new taxation was introduced to fund this – taxes are already rising and we know that deadweight loss increases proportionately with the square of the tax rate, so jacking up income/expenditure taxes just to fund a scheme such as this could be a really bad idea.

  7. Could some of the financing come from the European Social Fund;

    http://www.esf.ie/en/homepage.aspx

    The EU employment commissioner Vladimir Spidla has indicated that it can. Obviously not the full €1bn (if such a figure materialises). David Begg also refferred to it yesterday in an interview on RTE.

  8. Karl – “status quo bias” is a widely used phrase in economics (albeit mostly used in the behavioural literature) and you are reading things in to my comment there that were not intended when I wrote it. You make a lot of points above about the extent to which the difficulty in imposing cuts and taxes should be taken into account and these are very interesting issues that I want to tease out more fully than just firing back a comment at you.

  9. @Karl Whelan — thanks for a brilliant blog entry (again) and I hope it has some impact on informed opinion.

    As you note, there was some careful empirical analysis of job creation schemes in Ireland published in the early 90s (looking carefully at some 1980s schemes) by Richard Breen (now at Yale) and others. They came to the same conclusions as studies elsewhere in Europe, and worldwide — job creation schemes as a general rule tend to be a collossal wastes of money.

    Take the 1/4 billion Euros intended for these poorly thought-out programmes and spend it on hospitals, or teachers, or tax reductions, or government debt repurchases, take your pick, they are all good uses. The jobs creation schemes are politically powerful ideas with very limited benefit beyond satisfying narrow political interests.

  10. @ zhou – Other People’s Money! Dead on!! Money is merely electrons dancing across a sheet of chemical phosphors! Just type a few extra zeros! Problem solved.

    I presume that somehow or other, some surplus ‘money’ has to be earned to pay both the principle and the exponentially compounding interest. I see no specific mention of how this could be achieved – it would require an annual growth of +7% without any additional credit being made available (that is, no additional debt is created). Anyone like to explain how this could be achieved?

    We need a Debt Jubilee. Cram down the debt fast. Absorb the shock as best we can. Start again. Very unpleasant, but it will work.

    Brian P

  11. Update on my suggestion about a Debt Jubilee:

    Go over to suddendebt.blogspot.com

    Brian P

  12. Hospitals are not wise expenditure. They represent a subsidy …….. to the ill. The money is never able to show any investment value unless the working life is thereby extended…. So anyone aged 50 and above can go to entirely private hospitals. Good Luck!

    A bit of a shock to see that? Subsidies are a fact of political life! Expect to see the death rate increase as public expenditure cuts in heath take effect.

    Is there any objective evidence that economists help productivity? Why not close all the publicly subsidized academic economic departments down until there is such evidence?

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