Official unemployment will likely cross the 10 percent barrier in the next few months, but if you count part-time and discouraged workers, you get something closer to 16 percent of the work force, which is horrible from any perspective and downright terminal for incumbents in 2010. Two of the most interesting ideas for fixing unemployment involve a payroll tax holiday and a tax credit for companies who hire workers. Which idea is better?
In broad strokes, the difference is this: The tax credit would likely be smaller and more surgical, with the benefits going to companies to reduce the marginal cost of new hires. The payroll tax chops FICA taxes (your Social Security and Medicare contributions), which are shared by employers and employees. That means businesses would have more money to make hires and workers would have more money to spend. It also makes it a blunter instrument that lacks incentives as specific as "no money until you hire."
The Economic Policy Institute says a job creation tax credit could create 5.1 million jobs in two years, costing the government about $27 billion. Timothy Bartik and John Bishop write:
• A job creation tax credit that refunded 15% of new wage costs in 2010 and 10% of new wage costs in 2011 could create 5.1 million additional jobs in the U.S. economy over these two years.
• The net cost of the tax credit would be roughly $27 billion, or about $5,400 per new full-time-equivalent job created over these two years.
The problem with these "tax incentive" policices is that they can always be gamed. Employers might try to finagle tax credits for hires they've already made, or were poised to make anyway. Some are concerned that firms might fire workers before the start date of the credit and hire them back when the credit kicks in, which would effectively mean the government's just handing out money to the companies.