For the next recession

Work share programs that have been implemented in 17 states have been successful in limiting the burden born by employers who need to cut spending that unfortunately results in layoffs and the burden taken by states coffers to help those unemployed.* From Stateline:

Here’s how it works. When a business enters a slump and needs to cut payroll, it can seek state approval for a plan to reduce employees’ hours instead of cutting jobs. For example, a 20 percent reduction in the workforce could translate to a 20 percent reduction in hours, or a four-day workweek. To help employees stay afloat, the state would pay workers about half of their lost wages through the federal-state unemployment insurance program, which temporarily provides laid-off workers with a portion of their paychecks.

Maybe for the next recession, whenever that may be, all states should be ready to work with employers when it comes time to look towards job cuts. Company’s win, worker’s win, and the state wins; a Pareto efficient outcome. Doesn’t get any better than that.

*I forgot to mention those that benefit the most from this are those who don’t have to go unemployed. They are able to retain a higher amount of job security (at the unfortunate loss of wages) and continue to retain job skills that could save themselves and companies in the long-run money.

Senate passes jobs bill

So the Senate just voted on the jobs bill and it is now going to Obama.  I predict with a 99.87% certainty that Obama will pass it, only so that he can push it aside to get political points while getting to bigger business for the next session of congress.  Here is what the bill will offer: (bullet points added, from NYT)

• …businesses that hire workers who have been jobless for at least 60 days will be exempt from paying the 6.2 percent payroll tax on those employees’ earnings until the end of the year. If those workers stay on for a full year, businesses will also get a $1,000 tax credit. (The employee’s pay would still be subject to the usual personal income taxes.) The business tax breaks would add up to about $15 billion in all.
• It also provides an extra $20 billion for road and bridge construction and extends the federal highway program through year-end.

And that’s it. $30 billion in corporate tax breaks is soon to follow, which is probably being pushed by Dems in order to compliment the oddly restrictive, albeit mildly effective hiring incentive.

But where is the investment tax credit Obama said he would like to see when he gave his State of the Union address? This bill won’t do much for employment as much as we hope.  Construction spending is only expected to ease some of the pain for construction workers on federal contracts.  Of course I can’t quantify what this will do. (I will look out for it) I know that at this turning point in the economy, with productivity up and a lot of pent up need for hiring, an investment tax credit would definitely stimulate demand.  Weak demand is the reason that’s keeping employment from taking off.

So the job picture didn’t work out as hoped

U.S. nonfarm payroll employment decreased by 85,000 jobs in December.  (here) However, the previous month was revised upward from 11,000 jobs lost to 4,000 jobs gained, so we were able to eke out some positive job growth after all.  My previous posted hoped for some positive job growth, given the prior enthusiasm and I’ll take some at least in the revisions.   It is interesting that the ADP numbers was only off by a 1,000 given the usual disparity, but that is mostly due to a decreases in the government employment.  Professional business services and health and education services happened to add a total of 85,000 jobs while every other sector dragged down the total number.  Overall, not good but not that bad either. At least the unemployment rate didn’t budge.  No one really hires during the holidays and will only fire given necessity.   In times like these necessity holds out more than usual since the environment for demand is poor.  This only leads me to believe that 2010 should be a good year for jobs and January will be the month to start.

A Case for the Investment Tax Credit

Obama has recently sparked debate about a proposal to spark job creation.  He wants the proposal to include incentives for small businesses to hire more workers, spend more money for infrastructure projects and offer rebates for homeowners who update their homes with energy efficient durable goods and weatherization renovations — that has come to be known as “cash for caulkers.”  The debate around the blog world has included some interesting ideas, including the “cash for caulkers” idea itself and a cut in the minimum wage, which has spurred tremendous uproar in the blogging community for and against it.

One proposal that has caught my eye is the Investment Tax Credit. (ITC) Mankiw has made several good points about the ITC that is well worth looking at.  First, a temporary ITC could help act as a similar mechanism to create negative real interest rates, much like what inflation could do, even though quantitative easing is now out of the question given Bernanke’s recent remarks. Second, like cash-for-clunkers, it would help stimulate AD in the short-run and move AS rightward in the long-run, but broadly so as to not favor a specific industry. And lastly, tax credits usually are a good idea if you want more of something.  Considering how low investment growth is, it would only make sense to target tax credits on something like investment.  If businesses focus on investing, it will help stimulate demand for capital goods, increasing the need for more labor to supply it.

If opponents want to say that this may just stimulate demand for investment in foreign capital goods, I would say that most investment worthy capital goods would be created here in the U.S.  Less value added products that usually come from abroad, if do happen to be purchased, still doesn’t mean that the products wouldn’t go toward future productivity and lower unit costs.  For what its worth, the economics out rightly support the ITC.

To drive the point further, Obama should really listen to what small businesses actually want.  Yes, America wants jobs, but small businesses are not going to hire unless they get what they want first.  While the blogosphere argues over lowering labor costs with the minimum wage, small businesses are asking for something different.   From Peter Crabb:

The latest reading of the National Federation of Independent Business (NFIB) Index of Small Business Optimism was down, but business owners don’t see a lack of bank loans as a problem.Twenty-nine percent of all respondents to the NFIB survey reported they have met their borrowing needs. Nine percent reported problems obtaining financing, which is one point lower than the previous period.

Why are small businesses not desperately seeking more financing? Because they have little reason to invest in their companies. In the survey, only 16 percent said they are making capital-expenditure plans for the next few months. Only 8 percent said the current period is a good time to expand facilities, and only 3 percent think the economy will improve.

Small businesses are not concerned about getting loans for making investment into their companies. In fact, among their chief concerns are:

[From the NFIB report] …we find that when asked to identify the most important problem small-business owners face at this time, poor sales are cited most frequently, high taxes second and government requirements third.

It seems that their chief concern is with demand. Small-businesses don’t necessarily care about making investments right now as they need revenues to catch up first. However, whether or not small business are enticed by an ITC, larger businesses would be. I am sure many companies would be willing to take advantage of it. And the downside? No one takes advantage of it and the treasury account stays the same.

Some more cases for the ITC can be found here and here.

So close…November’s employment figures

The employment and unemployment numbers came out today.  Unemployment inched downward to 10% and almost eked out a positive employment figure with a loss of 11,000 jobs.   These numbers are highly optimistic.  Although preliminary, it is a stark contrast from the consensus estimates of -116,000 and IHS Global Insight’s glum prediction of -175,000.  This may signify an early turning point in economic recovery.  Just look how close those payrolls almost reach 0.

I would expect the preliminary numbers to be revised downward, and that employment growth will stagnate over the holiday season as employers take a breather from either hiring or firing. I think we will be able to have positive employment growth well into early 2010, say, for the month of January?

Productivity hits a whopping 9.8%

While job losses are hampering down optimism for recovery in the near-term, productivity numbers released today was a whopping 9.8%.  Makes sense considering the large number of job losses mounting while output had increased 3.5%.   Although job losses are bad in the near-term, in the long-term, higher productivity leads to more income.  So while some people are feeling the pain with one of the worst labor markets since the great depression, businesses are handling the recession most effectively by creating value and income growth for the mid-to-upper echelon of the American public.

This unfortunately leaves many in the bottom quin-tiles of the economic ladder left behind.  The BLS’s “Alternative Measures of Labor Under-utilization” (basically underemployment) clocking in at 15.2% illustrates how poor the labor market really is.  I have recently posted my thoughts on what I call the “new unemployed,” which is going to drastically shape the economic environment for the future of America unless important structural changes happen such as making investments in technical and vocational education that will help yield a more specialized workforce.

WANTED Analytics: Oct 09 Job Forecast -224,000

WANTED: Analytics posted their October 09 Job Forecast for the BLS numbers coming out on November 6th.   WANTED predicts that there will be a job loss of -224,000.  An upward trend since the previous month due to higher Unemployment Insurance claims.  Not as high as they wanted to forecast given marginal increases in the amount of online job ads.

 

Deflation Worries…Again?

Free exchange posted a piece on whether or not we should be worrying about deflation again.

Today, the BLS released September producer price data, which showed a surprising decline in headline inflation of 0.6%. Core producer prices dropped by 0.1%. And while the headline figure in August increased 1.7%, the broader trend is clearly downward:

That’s a chart of the three-month percent change in core producer prices. The last entry there is 0.0; prices have been flat since June, essentially, before which they were still increasing at a very slow pace.

Perhaps prices will not begin falling outright as the year draws to an end. Recent increases in capacity utilisation indicate that some upward pressure on prices may begin to appear. But housing cost categories will probably keep falling, and labour costs will probably keep falling. Preliminary surveys of consumers and retailers indicate that holiday spending will be depressed, and discount shopping will be quite common. The bigger threat at this point is clearly deflation, rather than inflation, and so it is somewhat disconcerting to see the Federal Reserve working to convince inflation hawks that it takes their concerns seriously.

It would make sense to hit another round of deflation.  The unemployment numbers have not gotten any better, putting a strain on consumer incomes and forcing buyers to demand lower prices.  It would be incredible if prices would dip below 0 once again considering that economic recovery (at least is believed to be) is underway.  Can an increase in GDP growth happen with receding price levels?  Maybe it is a symptom of our “jobless recovery.”

UPDATE:  Producer prices dropped 0.6% in September, while core producer prices fell 0.1%. (here) Most of the drop was from energy and food but also trucks and computers.  Weak demand is pushing prices lower.  Deflation definitely is starting to look like a reality.

UPDATE (10/21): Econbrowser has a great post showing that unemployment can have downward pressures on expected inflation.  More of the reason to assume we are in a period of deflation, no? But why has commodity prices relative to a sinking dollar not keep up?

Gender Unemployment Gap

From Free Market Mogo, the current recession has had a huge gender unemployment gap. (2.7% to be exact)

Theories?

- Most construction employment, one of the hardest hit, is primarily occupied by men.  Same could be said for finance.

- Men are more likely to be in cyclical occupations since they have higher mobility and tend to move into growing, but volatile, job markets.  Women prefer to be more grounded and take less cyclical occupations.

The Next Fix: Job Tax Credit

So now that the stimulus hasn’t been able to show any weathering to the recession, (except for maybe in a few states)  momentum has been gained (thanks to the NYT article here) in igniting talks over the blogosphere, especially with economists, over whether a job tax credit is a good idea or not.   Alex Tabarok at MR has rattled off — not only including those in support mentioned in the article — those in the blogosphere who are in support, which is an impressive list.

So what do I think?  From what I understand in labor economics is that a decrease in labor cost will be able to increase the demand for labor.   In a  comparative static equilibrium model for labor markets, it is a beautiful thing — questions I would love to be asked when learning them during economics class.  Reducing the labor cost should be able to shift the supply curve forward, increasing the quantity of labor demanded which translates into more jobs.   In addition, the tax credit doesn’t affect the variable marginal product of labor because new employees don’t have to worry about taking lower wages.

However, isn’t AD what we are trying to shift outwards? I don’t see how employers will find the incentive for replenishing some of the dead weight loss when AD can’t meet the supply.  I would assume that this could lead to cheaper prices for consumers, but this could only happen in the long term and I don’t think that 2 years is enough of a time frame for capital investment to catch up.  I won’t discount the fact that the economy is much more dynamic and that an emphasis can be placed more on labor, rather than capital.  But the economics to me is murky, and for that matter, without another proposed stimulus in the works, this wouldn’t have much of an impact that we believe it would have.  It would have been best if the tax credit provision was included in the original stimulus.  I will say that much of the stimulus funds are still working their way through and that this could be the last step in helping to boost a recovery within the economy, especially in slowing the accelerating unemployment.

Update: Mankiw just posted a great critique on the tax credit.