Search Penny Hill Press

Tuesday, March 2, 2010

Unemployment: Issues and Policies

Jane G. Gravelle
Senior Specialist in Economic Policy

Thomas L. Hungerford
Specialist in Public Finance

Marc Labonte
Specialist in Macroeconomic Policy

The National Bureau of Economic Research (NBER) has declared the U.S. economy to be in recession since December 2007. The unemployment rate in December 2007 was 4.9%; by October 2009, the unemployment rate was above 10%. Although economic output began to grow in the third quarter of 2009, many economists expect that the labor market will remain weak into 2010. In response to high unemployment, some Members of Congress have proposed a job creation bill. This follows several policy steps taken since the economy entered the recession, including stimulus bills in 2008 (P.L. 110-185) and 2009 (P.L. 111-5), an unprecedented expansion in direct assistance to the financial sector by the Federal Reserve, and the creation of the Troubled Asset Relief Program (P.L. 110-343). 

President Obama, in a speech on December 8, 2009, proposed an additional stimulus package, which would include tax and other benefits for small business, infrastructure investments, incentives to promote energy efficiency, an extension of benefits for the unemployed, aid to state and local governments, and emergency assistance. The Jobs for Main Street Act of 2009 (H.R. 2847) passed the House on December 16, 2009, and included an extension in unemployment insurance benefits and Consolidated Omnibus Budget Reconciliation Act (COBRA) health benefits, aid to troubled U.S. states and small businesses, and an increase in infrastructure spending. In addition, some policy analysts have proposed a small business hiring subsidy modeled on the 1977-1978 New Jobs Tax Credit. The Senate is considering stimulus proposals, including a bill (S.Amdt. 3310 to H.R. 2847) to provide job tax credits, an extension in expensing for small business, and an extension of highway funding. 

Most of the proposals discussed as part of a potential additional macroeconomic jobs bill are traditional fiscal stimulus policies. That is, their objective is to increase total spending (aggregate demand) either through direct spending on programs or by providing funds to others that they will spend (through tax cuts, transfer payments, and aid to state and local governments). Fiscal stimulus is only effective when the policy options actually increase aggregate demand. 

Some argue that the job tax credit proposal is different from traditional fiscal policies in that its objective is to directly increase employment through a subsidy to labor costs. Studies that examined the 1977-1978 jobs tax credit found mixed results—some conclude that the tax credit was responsible for creating a significant number of jobs, while others conclude that it was ineffective. 

The choice of financing affects both the macroeconomic impact and the cost-benefit tradeoff of the policy proposal. Policy measures can be financed by cutting other spending, raising other taxes, or increasing the budget deficit. Economic theory indicates that a deficit-financed policy proposal would have the maximum impact on employment in the short term. Policy changes that increase the deficit, however, move the budget further from long-term sustainability. 

Some policymakers have proposed redirecting funds under the Troubled Asset Relief Program (TARP) to finance job creation proposals. Proposals to redirect TARP funds to finance job creation proposals in essence pay for those proposals by reducing the amount that the Treasury Secretary is authorized to purchase under TARP by the cost of the proposal. Since TARP is not near that ceiling today, any proposal that reduces TARP authority by less than $150 billion would not force TARP to be reduced from its currently planned size. Therefore, it would cause the actual budget deficit to increase from the current deficit by the size of the job creation proposal.

Date of Report: February 18, 2010
Number of Pages: 19
Order Number: R41006
Price: $29.95

Document available electronically as a pdf file or in paper form.
To order, e-mail or call us at 301-253-0881.