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Efforts to Spur Jobs Cost Less Than Advertised PDF Print E-mail
Articles | Business
Written by Morphus on Thursday, 20 May 2010 09:18   

The Act authorizes the expenditure of $75 billion over two years in grants to retain jobs in local government that would otherwise be lost due to budget constraints and to create new jobs in local government employment and non-profit service providers in communities.

Unfortunately, concern over federal budget deficits has become a prime stumbling block to enacting efforts like LJAA that would stimulate job creation. Indeed, rather than examine the effects of legislation through multiple lenses—number of jobs, distributional effect across incomes or geographic regions, the upward or downward pressure on poverty—the deficit impact has been elevated to the most important measure of legislation. Even then, it is often misrepresented: spending and cost are not the same things. This Policy Memo points out that while the $75 billion in outlays from LJAA represents the gross cost of the legislation, a truer accounting of its overall effect on deficits would consider offsetting effects, such as higher tax collections and reduced need for social spending. A reasonable calculation of these offsetting benefits shows that almost $40 billion of the bill’s cost would likely be offset by a combination of higher tax collections and reduced safety net expenditures.

Jobs preserved and created by the LJAA:
The “bottom-up” approach to deficit offsets

The Education and Labor Committee staff has provided estimates of jobs that would be retained and new jobs that would be created with the passage of LJAA. We can use these to estimate budget offsets provided by the LJAA’s effect on unemployment insurance spending, personal income taxes, and payroll taxes. The committee’s job estimates are:

Retained workers
204,706 in local government
90,501 in rural area local government

New jobs funded by grants to local government
122,823 in local government
142,782 in community non-profits

New jobs in rural areas
53,215 in local government
63,193 in community non-profits

In addition to the direct job creation numbers supplied by the committee staff, we can estimate indirect job creation by using the same macroeconomic multiplier referenced above: every $1 spent in state and local government generates $1.40 of economic activity. Assuming that the ratio of induced jobs is equal to the ratio of induced spending, this would mean that the roughly 680,000 jobs directly created by LJAA would also support 195,000 indirect jobs. If we instead assume that the direct jobs supported by LJAA are more labor-intensive than average, then this might lower the estimates of indirect job creation. Government jobs do tend to be roughly 30% more labor-intensive than the economy-wide average, so to be conservative we will reduce the estimate of indirect jobs by 30%, using an estimate of 150,000 indirect jobs supported by LJAA.

Indirect jobs

How to calculate offsets stemming from retained workers
Retained workers are those whose jobs would have been lost but are able to remain on payrolls for the duration of the bill’s spending impact (two full years). As a result of their continued employment, these workers will continue to pay federal income and payroll taxes and will not make claims on unemployment insurance.

Income and payroll tax offsets
Estimating the income tax offsets will require some crude assumptions, as income tax varies dramatically based on filing status. At $43,385.602—the average wage for a full-time, full-year government worker—married couples with children would likely be receiving a tax refund, while single filers could be paying 6% or more in taxes. To avoid making assumptions about family composition, we just use the average percentage of income paid in federal income tax for tax payers with income between $40,000 and $50,000. The Tax Policy Center (unpublished data) estimates that this is 2.5%. Table 1 shows that the estimated income tax offset would be $669,907,000.

Read More: EPI

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