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Friday, October 19, 2012

Unemployment: Issues in the 112th Congress

Jane G. Gravelle
Senior Specialist in Economic Policy

Thomas L. Hungerford
Specialist in Public Finance

Linda Levine
Specialist in Labor Economics

The longest and deepest recession since the Great Depression ended and an expansion began in June 2009. Although output started growing in the third quarter of 2009, the labor market was weak in 2010, with the unemployment rate averaging 9.6% for the year. Despite showing greater improvement toward the end of 2011, the unemployment rate averaged a still high 8.9% for the year. The labor market has continued to slowly strengthen in 2012, with the unemployment rate in September measuring 7.8%—the first time it has been below 8% since January 2009.

Several policy steps were taken after the economy entered the Great 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, P.L. 111-312 extended the 2001 and 2003 “Bush” income tax cuts through 2012 as well as other expiring tax provisions and emergency unemployment benefits through 2011. The Tax Relief, Unemployment Reauthorization, and Job Creation Act also cut the payroll tax by two percentage points through 2011 as well.

Continued high unemployment has led to concerns about the need for additional policies to promote job creation. The President proposed a stimulus package in September 2011—the American Jobs Act—which was introduced by request in the House (H.R. 12) and Senate (S. 1549). The two percentage point payroll tax cut that was due to expire at the end of 2011 was extended into early 2012 as part of the Temporary Payroll Tax Cut Continuation Act (P.L. 112- 78). The payroll tax cut and emergency unemployment benefits were extended through 2012 as part of the Middle Class Tax Relief and Job Creation Act (P.L. 112-96).

More recently, attention has focused on the upcoming significant increase in taxes and decrease in spending popularly referred to as the “fiscal cliff.” Economic projections have suggested that these policies will dramatically slow growth and perhaps lead to a recession in the first part of 2013. Proposals have been made to extend some of the expiring tax cuts (H.R. 8, S. 3412, S. 3413, S. 3521) although there is disagreement about which cuts to extend.

This report considers three policy issues: whether to take additional measures to increase jobs, what measures might be most effective, and how job creation proposals should be financed. Most proposals discussed as part of a potential additional macroeconomic jobs bill are traditional fiscal stimulus policies. 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). Proposals for employment tax credits are different from traditional fiscal policies in that their objective is to directly increase employment through a subsidy to labor costs.

To be effective, fiscal stimulus is generally deficit financed. Although a stimulus measure could be paid for by cutting other spending or raising other taxes, these financing options will offset the stimulative effects on aggregate demand. It is possible to choose a deficit-neutral package of tax and spending changes that would stimulate aggregate demand if some types of measures induce more spending per dollar of cost than others, but such an effect would likely not be very large. The choice of financing affects both the macroeconomic impact and the cost-benefit tradeoff of the policy proposal. If such an effective stimulus package could be designed, it would have the advantage of not exacerbating the challenges of a growing debt.

Date of Report: October 5, 2012
Number of Pages: 18
Order Number: R41578
Price: $29.95

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