Thursday, February 13, 2014

Joe Kristan of Roth & Company PC has some thoughts on my job creation tax credit paper


He read a comment I recently made about it on EconLib. He first quotes me, then responds:
"My prior was that they would create jobs and raise wages. I have a good identification strategy – an RDD model. But one thing lacking in the existing literature on it is a way of dealing with displacement effects (in other words, person A gets the job from the tax credit by displacing person B who was not eligible for the credit). I can deal with that (at least within-county displacement). I expected that would reduce the effect somewhat of course, but I was sure even after accounting for displacement the credits would still generate jobs. 
So far, they seem to reduce employment. Displacement appears to be a big problem. 
There is one other explanation I’m investigating now. You have to create full time jobs to get the credit, so it is possible that I’m seeing a negative employment effect because part time jobs are being replaced with full time jobs. I’m investigating that now with individual level data. So in the end, it may create full time jobs and destroy more part time jobs, in which case it would be interesting to look at the impact on total hours. 
I’m not sure how it will all shake out in the end, but I am definitely less confident in policy than I was before I started this. 
Mr. Kuehn should be respected for following his data in spite of his prior assumptions, but that’s the result I would have expected.  The money going to the subsidized jobs has to come from somewhere, and much of it comes from unsubsidized businesses.  The politicians like to point to the jobs they “create” with “Economic development” incentives, but they ignore the loss of jobs in competing businesses and from the increased taxes on the unsubsidized. 
It’s the old broken window thing."
I don't quite agree, although it's nice to have alternate perspectives that get me thinking of what responses to anticipate in the paper and in presenting it.

These are county-level credits. It’s quite reasonable to point out that the money has to come from somewhere, but that “somewhere” is for the most part going to be wealthier counties that get less generous benefits. I would still expect a positive impact on employment in poorer recipient counties. Of course it has to be understood as a development strategy for less developed areas, and not necessarily a boon for the whole state. So I still find it a little surprising. Even though I have the chapter drafted, there’s so much additional work I want to do now and additional things I want to check out that I still have a while to go – so we’ll see!

The other point to make is that this is a credit to encourage job creation. Even if it were pushed out to the whole state, it doesn't follow that unsubsidized firms pay for it such that there’s no net effect on employment. Instead you are probably more likely to have other things compensate (as an economist my natural inclination is to think about capital, and substitution to a more labor-intensive production technology). So again, it may not be welfare enhancing for the state as whole and one would need to qualify that, but I think you’d still expect to see a boost to employment.

I definitely agree with the broad thrust of his post though. The fact that displacement in unsubsidized firms is not really treated in the literature is a major focus of my paper. My paper does not compare subsidized firms to unsubsidized firms – instead it compares regions with more generous subsidies to regions with less generous subsidies. So if firm A just shuffled workers away from firm B across the street it will not show up in my study as a net increase.

So I definitely appreciate thinking about these countervailing effects.

Joe would also need to explain why employment is going negative and earnings are going positive. That doesn't quite make sense with his explanation. As he quoted me explaining, I am currently chasing down a few explanations that would explain the movement of employment and earnings in opposite directions (because I don't think we want to argue that a demand side tax credit creates a negative supply shock!).

These thoughts on my work are great (even though I haven't shared it yet.... I should probably post it). I got some thoughts from Ryan Murphy too recently. It means recoding a bunch of things though... grrrrrrr. But good to catch. I reran the headline models and it doesn't change any of the results substantially, which is reassuring.

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