Search Penny Hill Press

Thursday, September 23, 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, as expected the labor market remained weak into 2010. In response to high unemployment, some Members of Congress proposed job creation bills, following 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 Troubled Asset Relief Program (TARP; P.L. 110-343).

President Obama proposed an additional stimulus: small business provisions, infrastructure investments, energy efficiency incentives, extended unemployment benefits, 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 states and small businesses, and infrastructure spending. Some analysts proposed hiring subsidies. The Senate is considering stimulus proposals, including a bill (S.Amdt. 3310 to H.R. 2847 ) passed on February 24, 2010, to provide job tax credits, an extension in expensing for small business, and an extension of highway funding. A similar bill passed the House on March 4 and was signed by the President (P.L. 111-147) on March 18. The Senate passed H.R. 4213 on March 10, which included extensions in unemployment and health benefits, among other provisions; the House passed a version on May 28 that included an extension of unemployment benefits. P.L. 111-226, providing funding to the states for education and Medicaid, was signed August 20, 2010.

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 job tax credits are different from traditional fiscal policies in that their 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 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: September 8, 2010
Number of Pages: 20
Order Number: R41006
Price: $29.95

Follow us on TWITTER at or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail
Penny Hill Press  or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.