Radio ads here in Rochester have been touting the “new” employment tax credits that have come from Washington, DC. The idea is that for firms that hire currently unemployed workers and keep them employed for a long-enough time period, they will receive a credit on their tax liabilities. Let’s not think of the labor economics of this for the time being. I just want you to think of the normative implications here.
For this tax to be funded, it has to be the case that currently profitable firms are paying taxes. These firms are possibly the very same firms that had runs of good luck, or behaved prudently, etc. so that they have been profitable through the down-turn. These firms in fact are very likely to be the ones that did the most hiring during the downturn, or that preserved employees even if it came at some expense to them. What we are effectively doing is penalizing these successful firms, these firms that have already hired workers, to make payments to less successful firms who either laid off workers during the recession, or were never profitable enough to encourage hiring. In other words, as we are prone to do in the Progressive paradise, our employment tax credit policy is a penalty to the successful job producing firms to the benefit of the unsuccessful non-job producers.
Maybe you think this is a good idea, and indeed I can conjure up a lovely labor economic model to support it. But before you get too excited, think about the long term consequences of that.
You are a firm in the year 2015 and the economy is entering a downturn. You have the choice of laying off workers or you can keep them on at some cost to you, so that you will be well positioned to make profits when the recession ends. Now that you have seen past government behavior lower the cost to firms of hiring workers in a recession, the scales have been tipped in favor of releasing workers. In addition, the tax burden placed upon firms because of this behavior has to be larger than if we never offered employment tax credits. In other words, the benefits of keeping workers on and productive are smaller as well. So, we have a case where the benefits of keeping workers are lower and the costs of releasing workers are lower, what do you think might happen during the next downturn? It would not be too much to suspect that the downturn would be faster and deeper than the previous one. So aside from the obvious bizarre asymmetry of the initial act, in the long-run it can very well lead to more of the very problem it was intended to solve.