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Wednesday, January 19, 2011

Unemployment: Issues in the 112th Congress

Jane G. Gravelle
Senior Specialist in Economic Policy

Thomas L. Hungerford
Specialist in Public Finance

Marc Labonte
Specialist in Macroeconomic Policy

Following the longest and deepest recession since the Great Depression, the National Bureau of Economic Research (NBER) has declared the U.S. economy to be in expansion since June 2009. 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, the labor market remained weak into 2010. For the year, unemployment averaged 9.6%, and showed no improvement in the second half of the year.

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). In December 2010, the President signed into law (P.L. 111-312) a package that reinstated an estate tax until the end of 2012, extended all other parts of the 2001 and 2003 (“Bush”) tax cuts until the end of 2012, extended alternative minimum tax relief and various other expiring tax provisions until the end of 2011, extended emergency unemployment benefits, and cut the payroll tax by two percentage points until the end of 2011. Nevertheless, the Blue Chip consensus forecast has the unemployment rate remaining above 9% throughout 2011 and near 9% in 2012. The 112
th Congress is likely to be faced with developing legislation to foster job creation.

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 in the economy (aggregate demand) either through direct government 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 employment 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 incremental 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. If proposals are financed by cuts in other spending or increases in other taxes, then those cuts or tax increases would lead to declines in total spending that would offset the effects of the initiative on aggregate demand in part or whole. Policy changes that increase the deficit, however, move the budget further from long-term sustainability.

Date of Report: January 11, 2011
Number of Pages: 14
Order Number: R41578
Price: $29.95

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