Want to add jobs? Subsidize employers: Report

Hiring credit most appropriate for job creation after recession

CHICAGO (Reuters) - Subsidizing hiring would be the most effective way to boost jobs in the current economy, because subsidizing workers would do little more than increase the number of jobseekers, according to research published on Monday by the Federal Reserve Bank of San Francisco.

While in a "normal" economy, employee subsidies have been found to be more effective, "in the aftermath of the Great Recession, hiring credits are a more appropriate job creation policy," wrote David Neumark, a University of California, Irvine professor and visiting scholar at the San Francisco Fed.

That's largely because demand for labour is so weak that the standard mode of subsidizing workers, raising the earned income tax credit, would simply boost the number of people looking for jobs without driving down wages or enticing companies to hire.

In addition, Neumark wrote, the stigma usually associated with hiring programs targeting the unemployed is less today than in ordinary times because so many people are out of work. In February, the unemployment rate stood at 8.3 per cent.

Reducing the high jobless rate has been a top priority for monetary policymakers. The Fed's policy-setting panel in January voted to extend the United States central bank's pledge to maintain ultra-low interest rates through late 2014, as officials highlighted the economy's slow progress in pushing down unemployment.

Lawmakers have done relatively little to encourage job creation directly, Neumark wrote, offering a small hiring credit with the 2010 Hiring Incentives to Restore Employment Act (HIRE) and giving credits and payroll tax breaks for companies that hire through the proposed American Jobs Act (AJA).

To be most effective, hiring credits should be restricted to companies that create new jobs, Neumark said, because of the risk of paying employers for adding hours for existing workers even if they do not hire new ones. Neither the HIRE Act of the AJA have such a feature, he wrote.

AJA's payroll tax holiday should be restricted to increases in employment to make it more effective in creating jobs, Neumark wrote.

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