Krugman on Jobs Subsidies and Protection

As an on-the-record sceptic about job subsidy policies, I found this piece by Paul Krugman interesting. In addition to being in favour of employment subsidy schemes, Krugman also discusses the benefits of employment protection legislation, which I would admit to being even more sceptical of (memories of the phrase Eurosclerosis come to mind). At this point, I’d stick to me original opinions on this issue but I’ll happily admit that Krugman is umpteeen times smarter than me.

Of course, when dealing with these issues in an Irish context, there are practical implementation issues to be dealt with. What I’ve heard so far about the employment subsidy scheme suggests that it’s exactly the kind of bureacratic mess that I expected it would be when it was announced.

Job Subsidies Plan Open for Business

The €250 million job subsidy scheme is open for applications from today until the 4th of September. I’m still not a big fan of this scheme, particularly given that it has to fit within overall budgetary parameters and thus necessitates €250 million of spending cuts and tax increases elsewhere. However, it is fair to say that some thought has gone into dealing with the deadweight loss element of the scheme.

Applicants for the subsidy will be scored out of 100 against the following three assessment areas: Credibility of restructuring plan (35 points), viability of the enterprise in the medium term (10 points) and the ratio of supported jobs to committed jobs (maximum score of 55 points).

This worst allowable score for this latter category is a score of 30 for a ratio of 1:1, meaning for each supported subsidised job the applicant would be required to commit to retaining another full time job for the duration of the subsidy (though how a struggling firm could really be made commit to this isn’t clear—what happens if they shut down?) 

The best score for this category of 55 is for a ratio 1:10.  If I understand this correctly, this means that the subsidy will not be allowed to apply to all employees in a firm and you will be more likely to get the subsidy if you only look for it to be applied to a small fraction of your employees.

In theory, this is good news if you’re worried about deadweight loss because the subsidy won’t end up being applied to all the employees of firms that are actually going to keep most of them on anyway. This element and the other two categories are also designed to avoid the jobs going to no-hope firms and pouring good state money after bad private money.

However, it’s pretty impossible to achieve both of these outcomes and as constructed, the scheme does seem likely to attract reasonably healthy firms, who may not really be planning to lay off many employees, to look for subsidies for a small fraction of their workers, knowing that this will give them a good score and make them more likely to obtain the grants. So one can still see plenty of potential for serious deadweight loss, which could blow up the actual cost of job saved well above the apparent level of €9,100 per employee.

The assessment process will involve Enterprise Ireland, IDA Ireland, Shannon Development and Údarás na Gaeltachta, and without doubt, will be a cheap and efficient process untinged by political interference or corruption related to existing relationships firms have with development agencies.

Cowen Announces Job Subsidy Scheme

An Taoiseach appeared today before the biennial conference of the Irish Congress of Trade Unions (incidentally, the highlight of their last conference was Mr. Cowen’s predecessor wondering aloud why those who criticised his economic policies didn’t go off and commit suicide.)  The Taoiseach’s remarks suggest that, despite David Begg’s disavowal of it, the €250 million job subsidy proposal is going ahead:

Drawing on detailed discussions with Congress, we are introducing a new initiative to safeguard vulnerable jobs through a Temporary Employment Subsidy Scheme. This will provide a subsidy to support jobs in exporting companies in the manufacturing or internationally-traded services sector.

Perhaps these detailed discussions with ICTU have changed the proposed scheme from the one criticised by me, Sarah Carey, and of course, David Begg.  However, there is no information in the official announcement to suggest so as of yet.  Indeed, it directs us to the document containing the original announcement of the scheme for “more information.”

As an aside, I’d note that the name of the scheme is a bit confusing.  I thought when I read it first that it was a scheme to promote temporary employment via a subsidy.  However, it appears instead to be a scheme that temporarily promotes employment via a subsidy.

Employment Schemes in Ireland During the 1980s: An Evaluation

Just a short addition to the discussion on job subsidies addressed by Karl Whelan on this blog.  Ireland had an extensive program of Employment Schemes during the 1980s. The following schemes accounted for 95 per cent of all participants on these kinds of interventions; Work Experience Programme, Employment Incentive Scheme, Enterprise Allowance Scheme, Teamwork and Social Employment Scheme.

Hartmut Lehmann and I outlined the details of these programmes and evaluated them in terms of their ability to get the unemployed back to work in 1990. 

Hartmut Lehmann and Patrick Paul Walsh, CEP and London School of Economics, “Employment Schemes in Ireland: An Evaluation” The Economic and Social Review“, Vol.22, No.1, October 1990, pp43-56

http://www.scribd.com/doc/17129901/Employment-Schemes-PP-Walsh

 

Karl is right to be nervous about their reintroduction. It is hard to prevent unintended displacement and substitution effects in these interventions,  employees taking on subsidised workers and letting go unsubsidised workers or taking on subsidised workers instead of intended unsubsidised workers.  

We have a history in dealing with mass unemployment and we should not ingore lessons from the research done from that time. 

Other notable papers at the time where

Breen, R. (1991), ‘Education, Employment, and Training in the Youth Labour Market’, General Research Series Number 152. Dublin: ESRI.

Breen, R. and B. Halpin (1989), ‘Subsidising Jobs: An Evaluation of the Employment Incentive Scheme’, General Research Series Number 144. Dublin: ESRI.

Begg Critical of Job Subsidies

David Begg of ICTU has responded to Sarah Carey’s article on job subsidies.  The essence of his reply is twofold.  First, he also thinks it’s a bad plan. He writes that

Carey is correct to point out that a “jobs subsidy scheme” of the nature she outlined would be disastrous. It would be a waste of vital taxpayers’ funds, it would do nothing to ease the jobs crisis and, of course, it would be wide open to corruption and abuse.

Second, the plan wasn’t his idea:

Unfortunately, where she went wrong was in attributing such an initiative to congress. The truth is that precisely this approach has been repeatedly proposed by employer and business groups. We have opposed such feckless initiatives from the outset.

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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.

Job Subsidy Plan “Announced”

The long-mooted job subsidy plan appears to be about to happen, though as is often the case in Ireland, the public can only learn about this through leaked details from social partnership talks, rather than through the publication for discussion of detailed government proposals.

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