A Credit to Hire Veterans Is a Good Idea, but It Won't Boost the Economy

It will positively impact the lives of some vets -- just don't expect it to reduce the national unemployment rate

Unemployment is a problem for recent veterans. On Friday, I noted that the unemployment rate for Veterans of the post-9/11 Gulf War was a staggering 12.1% -- nearly 50%* higher than the rest of the population. Anyone concerned about this problem should be pleased to see that President Obama's proposal to provide firms a tax credit for hiring Veterans is gaining traction in Congress. But we shouldn't confuse the measure with a way to create jobs and boost the economy more generally.

Just to Be Clear: This Is a Good Idea

In what follows, I don't wish to discourage anyone from thinking that this tax credit would be a good idea. It helps to correct what I consider a grave injustice. If these brave men and women chose not to fight for their country but merely remained civilians instead years ago, then many would more likely be employed today. But instead a large number happen to be hitting the job market at a historically bad time, so many are having trouble finding work. Providing employers a small incentive to hire veterans will help to solve this problem.

President Obama proposed this as a part of his jobs plan unveiled in September. It has mostly fizzled in Congress, but the GOP will likely support this measure. After all, helping veterans is something Republicans and Democrats can both agree on. It would provide a tax credit under the following conditions:

• Up to $2,400 to hire any veteran who has been unemployed for at least four weeks
• Up to $5,600 to hire any veteran who has been unemployed for longer than six months
• Up to $9,600 to hire a veteran with service-connected disabilities who has been unemployed for longer than 6 months.

Currently, a credit is already in place to provide $4,800 to hire a veteran with service-connected disabilities without any stipulation on how long he or she has been unemployed. That credit would remain in place.

This Won't Create Many Jobs

While this may help boost the employment of veterans, it shouldn't be expected to boost hiring in general. As we have seen with previous hiring credits, the impact on overall unemployment will be small. Most firms collecting the credit would have hired anyway, and now get a small bonus for hiring. There may be a few new jobs created on the margins, but most firms will not hire unless they see the demand needed to warrant that hiring. A tax credit just isn't enough. 

This point is even more pronounced for a specific tax credit like this one. Instead of hiring more workers, this will more likely shift the proportion of workers that are hired towards veterans. If two strong candidates apply for the same job and one is a veteran, then an employer now has a strong reason to pick the veteran over the other applicant. Few employers will create new jobs from scratch just to try to bring on more veterans and obtain the credit.

This Won't Cut the Unemployment Rate Much

Although the unemployment rate for recent Gulf War veterans is quite high, the unemployment rate for veterans overall is relatively low -- just 7.7%. According to the Bureau of Labor Statistics, 859,000 veterans were unemployed in October. That's a lot, but it only accounts for 6.6% of all unemployed Americans.

And what really matters when we're talking about the labor market is how many more people are jobless now than when the unemployment rate was at its natural rate. In October, 6.9 million more people were unemployed than in November 2007, when the rate was just 4.5%. Of that 6.2 million, 396,000 are veterans. If every single one of those additional unemployed veterans got jobs, the unemployment rate would be reduced from 9.0% to 8.8%. And remember, this makes the very generous assumption that these jobs wouldn't have been created without the credit, which the argument above explained is very unlikely.

This Won't Provide Much Stimulus

But employers would be getting some free money from the government too for hiring veterans. Even if they would have done so anyway, that's actual stimulus. Won't that boost the economy? It will, but its effect will be relatively negligible. Let's do a quick estimate.

First, imagine that all 396,000 of veterans who are unemployed above the natural rate were hired as a part of this program. And let's assume that the average credit was somewhere in the middle of those offered -- at $5,600. Under those circumstances, $2.2 billion of stimulus will be provided to employers who hire veterans. That might sound like a decent amount of money, but it would amount to just 0.3% of the $787 billion stimulus package passed in early 2009 -- and even its effects are unclear.

I want to stress again that encouraging employers to hire veterans is a very good idea. It just isn't very good stimulus. If this turns out to be the crowning achievement of the Obama jobs bill, then little actual support for the economy will have been provided. 

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*Note: This initially read "twice as high," which was a incorrect. Sorry for any confusion.

Image Credit: Larry Downing/Reuters