Why Firms Shouldn't Hire To Get Tax Breaks

One aspect of President Obama's probably-doomed jobs plan would provide tax breaks to firms that hire Americans who have been unemployed for at least six months. This sounds sensible from an economic point of view: if the government creates an incentive to hire those who have been jobless for an extended period, then the long-term unemployment problem may begin to improve. But here's the problem: it might not spur any additional hiring. Intsead, the firms that get the money will be mostly the same ones that would have hired anyway. What about companies that do hire due to this incentive? Small business owner Jay Goltz says that they will ultimately regret chasing after the tax credit.

He explains this assertion in a post on the New York Times' "You're the Boss" blog:

Rewarding someone for hiring is playing with nature. There really are only two possibilities: either you are rewarding employers to do something they would have done any way, or you are rewarding employers to do something they weren't sure they wanted to do. Do you remember my comment about avoiding pitfalls? Bad hiring decisions rate right up there with the most serious. A business should hire because of demand, not because of an incentive. Think about this: If a kid's father offered you $4,000 to hire his kid, would that have any bearing on your decision? Of course not. Why should it be any different if the money comes from the government?

Some people suggest that this credit might help if a business owner is "on the fence" about hiring someone. Here is what I have learned: If you are on the fence about hiring someone, DON'T. Get off the fence. Call more references, interview the person again, make sure you really need someone. Hiring is serious business. If it turns out that you don't really need someone, you eventually will have to lay off this person. You will be the bad guy, the responsible guy, the guy who pays all of the unemployment insurance. You will have done no one any good. An incentive to hire might not be an oxymoron, but the word moron may enter the equation. Sorry. It has been a long three years.

This reveals the central problem with these sorts of incentives: if demand isn't there to support the new hire, then he or she may need to be laid off before long.

Read the full story at You're the Boss.