Payroll tax cuts and gross job flows

by on October 8, 2009 at 7:19 am in Current Affairs, Data Source, Economics | Permalink

In the comments section to my last post a number of people argued that in the current recession firms simply don't have the sales to support a larger workforce so a small reduction in labor costs from a payroll tax cut isn't going to increase employment appreciably.

The argument sounds plausible but the premise is wrong – in fact, lots of firms are selling and hiring.  In July, for example (the most recent data), firms hired over 4 million workers.  Yes, 4 million.  Even in declining sectors like construction there were 346,000 new hires in July alone.  In the 12 months preceding July, firms hired 51.3 million workers.  The problem of course is that during the same time there were 56.6 million job separations (quits, layoffs, retirements) for a net job loss of 5.3 million.

Even though we are still experiencing a daily net loss of jobs it's important to remember that there are about 200,000 hires every working day  Lots of firms are hiring.  In order to increase employment a payroll tax cut need not shift firms "from firing to hiring" it need only increase the hiring rate of those firms already hiring or on the margin of hiring.

The data is from the JOLTs survey which releases more data tomorrow.  The uber-source on job flows is Davis and Haltiwanger and their extensive work with co-authors.  For a good, non-technical, introduction to this and related topics I recommend, The Natural Survival of Work,

1 kharris October 8, 2009 at 8:13 am

The rhetorical focus in DC seems to be on helping small business in order to spur hiring. For once, the rhetorical focus may match the facts. Small businesses are a far larger source of net job loss in this cycle than is normal. Dudley pointed out in his recent speech that small businesses have trouble finding credit for a number of reasons. If we are going to aim at boosting hiring through a tax credit, we might also want to try some directed credit.

I would also ask whether a focus on gross numbers can’t distract us. We are, after all, interested in the net result. While 4 mln gross hires seems big, we also know from the JOLTS data that openings as a share of the labor market are at extreme lows. That is to say, 4 mln is a small number for our purposes, not a large one. Looking at 4 mln in isolation, we may be led to think that a tax credit will help, but are we being tempted to end the analysis too soon, dazzled by what seems at first glance to be a big number?

2 coberly October 8, 2009 at 8:49 am

there were other comments about the absurdity of a payroll tax cut, but when you have an idee fixe you tend not to hear what people are trying to tell you.

yes, on paper… your paper… a tax cut looks like a stimulus… other things being equal. but other things are not equal. other things have consequences. and why should stealing from Social Security to get another “stimulus” do any more good that the last three stimuluses… or the stumuluses that led to the recessioin in the first place. no. can’t think about that. there’s free money in that Trust Fund… gotta get us some of that.

3 rpl October 8, 2009 at 9:28 am

Coberly, why would we have to “steal from” Social Security? FICA and other revenue sources are co-mingled in the Treasury anyhow, so there is no reason you couldn’t suspend FICA and stipulate that the “trust fund” be funded by general revenue during the period of the suspension.

The government’s fiscal position doesn’t really depend on whether you increase spending or cut revenue, nor on which source of revenue you cut. Either way, it all has to be funded with more public debt. However, if you want to stimulate employment, and you have a fixed amount of debt you want to issue to do it, then you could do a lot worse than suspending a tax that is widely acknowledged as suppressing employment (and is horribly regressive to boot).

4 tomhynes October 8, 2009 at 10:46 am

Alex, I don’t get your point.

Suppose in July four million McDonalds workers quit or were fired and found jobs at different McDonalds. Call it the dance of the burger flippers. There is no net increase in economic activity and it is totally irrelevant to the marginal effect of a payroll tax decrease on hiring. However, you trumpet “Four million workers were hired!”

5 babar October 8, 2009 at 11:18 am

coberly and bruce webb are a strong supporter of social security and believes that conservative economists want to gut it and would do so through a back door because it is a popular program. an example of such a back door would be not funding it for a year or two and then saying “wait, it’s insolvent, we have to cut it”.

the fact is that “internal” government debt (such as the “lock box”) does not have the same legal status as externally issued treasury bonds but represents a very tangible political promise. if you favor social security in its current form (or close to it) over the long run you will guard this political promise against any and all attack or degradation.

6 Bill Woolsey October 8, 2009 at 11:45 am

Alex:

Lowering the payroll tax should also reduce the layoffs as well. Of course, a credit for new hires wouldn’t have that effect.

Further, the lower payroll tax and lower costs can and should result in lower product prices, and so a higher real volume of sales given nominal expenditure.

P.S. It is incredible the size of the turnover relative to the net change.

7 Alex Tabarrok October 8, 2009 at 12:13 pm

Bill, agree on all points.

Alex

8 Travis October 8, 2009 at 6:05 pm

Seriously all technical information aside why do payroll taxes get some much love from our political institutions. They are unhelpful, regressive, and hazardous. They belong in the trash bin of fiscal policy. I mean as a bleeding heart liberal I don’t understand the appeal of taxing young low income workers to pay for the old. I don’t see why we couldn’t atleast exempt the first 20,000 and raise the cap on the more affluent (you could even push the latter part out a few years to push outside the current downturn). It’s having a window put into a house that opens into a brickwall, when you could have put it to lookout on a majestic mountainscape. Better to do away with the whole thing though and just pay the old people from income (preffered) or VATs (progressively done).

9 jorod October 8, 2009 at 8:18 pm

Firms will not hire when they know Obama is getting ready to increase taxes. Best he raises taxes now and get it over with.

10 John Thacker October 9, 2009 at 2:44 pm

When has cutting taxes in the US ever delivered the promised benefits?

Which promised benefits? Decreasing the deficit? Very rarely, but neither has stimulus spending. Increasing GDP growth and decreasing unemployment? The 1981 tax cuts absolutely did that, or at least have better results than spending stimulus.

why should stealing from Social Security to get another “stimulus” do any more good that the last three stimuluses

Why is it taking from the Trust Fund? All Congress has to do is pass a provision as part of the law saying that we’re transferring money from the General Fund to the Trust Fund to make up for the payroll tax cut, and increase the General Fund deficit. Problem solved. Instead of going into more General Fund debt to pay for spending, we go into more General Fund debt to pay for the payroll tax cut.

If you argue that that’s accounting mumbo-jumbo, then you have to concede that the Trust Fund is in general a myth too.

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