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

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Business Investment and Employment Tax Incentives to Stimulate the Economy

Thomas L. Hungerford
Section Research Manager

Jane G. Gravelle
Senior Specialist in Economic Policy

According to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the U.S. economy has been in recession since December 2007. Congress passed and the President signed an economic stimulus package, the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), in February 2009. The $787 billion package included $286 billion in tax cuts to help stimulate the economy. Among the tax reductions, many were tax incentives directed to business. The preliminary estimate of fourth quarter real gross domestic product (GDP) growth is 5.7%; the unemployment rate, a lagging indicator, averaged 9.6% in the third quarter and 10.0% in the fourth quarter of 2009. Federal Reserve Chairman Ben Bernanke expects the economy to continue growing at a modest pace, but predicts that bank lending will remain constrained and the job market will remain weak into at least 2010. To further assist unemployed workers, help business, and stimulate housing markets, Congress passed the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92). The Obama Administration has advocated further business tax incentives to spur investment and employment, especially for small business. 

The two most common measures to provide business tax incentives for new investment are investment tax credits and accelerated deductions for depreciation. The evidence, however, suggests that a business tax subsidy may not necessarily be the best choice for fiscal stimulus, largely because of the uncertainty of its success in stimulating aggregate demand. If such subsidies are used, however, the most effective short-run policy is probably a temporary investment subsidy. Permanent investment subsidies may distort the allocation of investment in the long run. 

Employment and wage subsidies are designed to increase employment directly by reducing a firm's wage bill. The tax system is a frequently used means for providing employment subsidies. Most of the business tax incentives for hiring currently under discussion are modeled partially on the New Jobs Tax Credit (NJTC) from 1977 and 1978. Evidence provided in various studies suggests that incremental tax credits have the potential of increasing employment, but in practice may not be as effective in increasing employment as desired. There are several reasons why this may be the case. First, jobs tax credits are often complex and many employers, especially small businesses, may not want to incur the necessary record-keeping costs. Second, since eligibility for the tax credit is determined when the firm files the annual tax return, firms do not know if they are eligible for the credit at the time hiring decisions are made. Third, many firms may not even be aware of the availability of the tax credit until it is time to file a tax return. Lastly, product demand appears to be the primary determinant of hiring. .


Date of Report: February 17, 2010
Number of Pages: 19
Order Number: R41034
Price: $29.95

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Social Security: The Government Pension Offset (GPO)

Alison M. Shelton
Analyst in Income Security

A worker is "covered" by Social Security if he or she pays into Social Security through the Old- Age, Survivors, and Disability Insurance (OASDI) payroll tax for 10 years (40 quarters). Currently, 96% of all workers are covered by Social Security. The majority of non-covered positions are held by federal, state, and local government employees. 

The Government Pension Offset (GPO) applies to Social Security spousal benefits, which are generally payable to the spouses of retired, disabled, or deceased workers covered by Social Security. The Social Security spousal benefit is equal to 50% of the retired or disabled worker's benefit and 100% of the deceased worker's benefit. 

Social Security spousal benefits were established in the 1930s to help support wives who are financially dependent on their husbands. It has since become more common for both spouses in a couple to work, with the result that, in more cases, both members of a couple are entitled to Social Security or other government pensions based on their own work records. Social Security generally does not provide both full worker and full spousal benefits to the same individual. Similarly, in the case of a couple where both members work, Social Security does not provide two full worker benefits and two full spousal benefits to the couple. 

Two provisions are designed to reduce the Social Security spousal benefits of individuals who are not financially dependent on their spouses because they receive benefits based on their own work records. These are 

• the "dual entitlement" rule, which applies to spouses who qualify for both a Social Security benefit based on their own work histories in Social Securitycovered employment and the Social Security spousal benefit, and 

• the GPO, which applies to spouses who qualify for both a government pension based on their own non-Social Security-covered government employment and a Social Security spousal benefit. 

The GPO reduces Social Security spousal benefits by two-thirds of the pension from non-covered government employment. The GPO does not reduce the benefits of the spouse who was covered by Social Security. 

Opponents contend that the GPO provision is basically imprecise and can be unfair. Defenders argue it is the best method currently available for preserving the spousal benefit's original intent of supporting financially dependent spouses, and also for eliminating an unfair advantage for spouses working in non-Social Security-covered employment compared with spouses working in Social Security-covered jobs (who are subject to the dual entitlement rule). 

In the 111th Congress, Representative Howard Berman has introduced H.R. 235, the Social Security Fairness Act of 2009, to repeal the GPO. Senator Dianne Feinstein has introduced a companion bill, S. 484, to repeal the GPO.


Date of Report: February 12, 2010
Number of Pages: 18
Order Number: RL32453
Price: $29.95

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Social Security Reform: Legal Analysis of Social Security Benefit Entitlement Issues

Kathleen S. Swendiman
Legislative Attorney

Thomas J. Nicola
Legislative Attorney

Calculations indicating that in the long run the Social Security program will not be financially sustainable under the present statutory scheme have fueled the current debate regarding Social Security reform. This report addresses selected legal issues which may be raised regarding entitlement to Social Security benefits as Congress considers possible changes to the Social Security program, and in view of projected long-range shortfalls in the Social Security Trust Funds. 

Social Security is a statutory entitlement program. Beneficiaries have a legal entitlement to receive Social Security benefits as set forth under the Social Security Act. The fact that Social Security benefits are financed by taxes on an employee's wages, however, does not limit Congress's power to fix the levels of benefits under the Social Security Act, or the conditions upon which they may be paid. Congress's authority to modify provisions of the Social Security program was affirmed in the 1960 Supreme Court decision in Flemming v. Nestor, wherein the Court held that an individual does not have an accrued "property right" in his or her Social Security benefits. The Court has made clear in subsequent court decisions that the payment of Social Security taxes conveys no contractual rights to Social Security benefits. 

Congress has the power to legislatively promise to pay individuals a certain level of Social Security benefits, and to provide legal evidence of Congress's "guarantee" of the obligation of the federal government to provide for the payment of such benefits in the future. While Congress may decide to take whatever measures necessary to fulfill such a obligation, courts would be unlikely to find that Congress's unilateral promise constitutes a contract which could not be modified in the future. In addition, a congressional promise not to reduce a specific level of Social Security benefits payable to certain eligible individuals would likely not overcome the constitutional principle, subject to due process considerations, that one Congress may not bind a subsequent Congress to legislative action or inaction. 

The calculations concerning the possible future insolvency of the Social Security Trust Funds raise a question whether that result would affect the legal right of beneficiaries to receive full Social Security benefits. While an entitlement by definition legally obligates the United States to make payments to any person who meets the eligibility requirements established in the statute that creates the entitlement, a provision of the Antideficiency Act prevents an agency from paying more in benefits than the amount available in the source of funds available to pay the benefits. The Social Security Act states that Social Security benefits shall be paid only from the Social Security Trust Funds and the act appropriates all payroll taxes to pay benefits. Although the legal right of beneficiaries to receive full benefits would not be extinguished by an insufficient amount of funds in the Social Security Trust Funds, it appears that beneficiaries would have to wait until the Trust Funds receive an amount sufficient to pay full benefits in the case of a shortfall, unless Congress amends applicable laws.


Date of Report: February 19, 2010
Number of Pages: 15
Order Number: RL32822
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Credit Union Member Business Loans

Pauline Smale
Analyst in Financial Economics

The credit union industry has long advocated for relief from statutory restrictions on business lending activities. Credit unions can make loans only to their members, to other credit unions, and to credit union organizations. Specific restrictions on business lending include an aggregate limit on an individual credit union's net member business loan balances and on the amount that can be loaned to one member. 

Industry spokesmen have argued that the current economic climate reinforces the argument for regulatory relief from limitations on member business loans. The current financial crisis has resulted in a contraction of credit available to small businesses in most sectors of the U.S. economy. Easing the restrictions on member business lending could increase the available pool of credit for small businesses. 

The past two Congresses considered but did not pass legislation providing additional lending authority. The banking industry has generally opposed legislation that would increase the powers of credit unions. Current legislation, the Promoting Lending to America's Small Businesses Act of 2009 (H.R. 3380) and the Small Business Lending Enhancement Act of 2009 (S. 2919) would provide credit unions with expanded business loan authority


Date of Report: February 17, 2010
Number of Pages: 7
Order Number: R40793
Price: $29.95

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