Should We Try to Make More Public or Private Sector Jobs?

Alan Blinder writes in the Wall Street Journal that the two big ideas in Washington for creating jobs are (1) public-service employment and (2) a tax credit for companies that hire. (For the record, I can think of a few more, including a payroll tax holiday, state relief and job sharing.) The first idea fights unemployment by adding public sector jobs. The second idea adds private sector jobs. Let's talk about their problems.

The idea of directly employing millions of jobless Americans intrigues me. Think about it this way. Congress just voted to extended jobless benefits. This put money in the hands of those most likely to spend their next marginal dollar. Public works projects are an extension of that principle. The government might pay about $30,000 a year -- more than jobless benefits but less than the average private sector job -- to put unemployed Americans to work -- cleaning up parks and urban areas and so on. It would be an efficient investment for the government -- "the stimulus equivalent of getting the middlemen out of the student loan program." Two problems: Public works projects can take months to set up, and what do you do with workers on public payrolls when the economy picks up -- dump them or continue to run a neo-WPA into 2011 and beyond?

Politically, the more palatable solution is to incent companies to hire with tax credits. Dean Baker explained how offering companies cash to cut their workers' weekly hours could both protect payrolls and give employers more cash to hire workers. This strategy, which is more common in Europe, is called job sharing (the government shares the responsibility to pay for the workers' shortened week).

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But Blinder considers offering companies a tax credit only after they hire. This is a complicated strategy and he expertly details some ways companies could game this system: (1) Fire Peter, hire Paul, and say "Look we hired! Tax cut please." (2) Replace one full-time worker with two part-timers (3) Divide one company into multiple companies on paper, then shuffle workers around to increase the payroll at those companies.

So these private sector job-creating strategies are implicit. Job sharing doesn't guarantee new jobs, it only guarantees more money for the employer. Tax credits are difficult to structure so that companies don't exploit the loopholes for taxpayer money. As in most public policy, there is no silver bullet in job creation.