Job Creation Tax Credits and Job Growth: Evidence from U.S. States

1. Job Creation Tax Credits and Job Growth: Evidence from U.S. States Robert Chirinko (University of Illinois at Chicago, CESifo) Daniel Wilson (Federal Reserve Bank of San Francisco) May 11-12, 2012 Tor Vergata, Sapienza, and Urbino Conference on “Beyond the Short Run: Growth, Market Imperfections and Macroeconomic Disequilibrium” 1

2. Motivation Important and timely policy issue... With U.S. unemployment stuck above 8%, much discussion about policies targeted at job creation Job creation tax credits (JCTC) in recent laws: Hiring Incentives to Restore Employment (HIRE, 2010), American Jobs Act (proposed) includes a $4,000 JCTC 2

3. Motivation Little empirical evidence about effectiveness Rarely tried at U.S. federal level Carter “New Jobs Tax Credit” in 1977-78 2010 small-business credit for hiring unemployed European experiences? JCTCs have proliferated among states over past 20 years –there have been 24 state JCTC “experiments” (17 currently in place) 3

5. Motivation In this paper, we collect data on, and analyze effects of, these state “experiments” 6

6. Preview of Results Average employment effect on impact is small ...and largely due to intertemporal substitution in states with implementation lag But small effect is due to small effective credit rates, modest elasticities of L w.r.t. the JCTC (0.35) Obama’s proposal would lower unemployment rate by 0.1 percentage points

7. Data -- Collection Identify all states with a (broad) JCTC For each state JCTC Track down original legislation enacting credit Identify date it was signed into law Identify date upon which new hires qualify for credit. Measure statutory credit value (dollar value or percent of wage) when possible (17 states) Merge dates with monthly state panel data on private nonfarm employment from January 1990 to August 2009

8. Data -- Background Job Creation Tax Credits: Credit against corporate income tax Credit frequently refundable or carried forward Firms usually required to maintain added jobs for extended period of time Rolling Base: Credit value proportional to increase in employment over “base level” (usually last month’s or last year’s level)

9. Data -- Background Two sets of JCTC states – “regimes”: • Immediate Qualifying Date < Signing Date • Retroactively or concurrently • Delayed Signing Date < Qualifying Date • Implementation lags exist before net job gains qualify • “Ashenfelter Dips” in Labor and “Fiscal Foresight” in Macroeconomics

10. Change in notation 1. Immediate = Retroactive + Concurrent 2. Delayed = Implementation Data -- Background

12. JCTC Adoption Exogeneity Theory

13. Some Theoretical Guidance • Inventory accumulation model • Firms choose labor (output) each period to minimize costs • Firms must also make a sales decision • Inventory accumulation is the residual • Labor costs depend on JCTC rate and thus varies over three intervals

14. Some Theoretical Guidance Implications: Rolling Base JCTC and inventory accumulation make labor (L) choice a dynamic decision: • Choose L* to equate the marginal product of labor (MPL) to user cost of labor (UCL) and incremental inventory holding costs across all periods • The response of L vary by • Regime (Delayed or Immediate) • Interval (Before, At, After)

17. Some Theoretical Guidance -- UCL Dynamic Profits = (F[L1] – wL1) / (1+r) + (F[L2] – wL2 + JCTC*w*(L2- L1)) / (1+r)2 + (F[L3] – wL3 + JCTC*w*(L3- L2)) / (1+r)3 + ………………….

18. Some Theoretical Guidance -- UCL FOC L1: F’[L1] = UCL1 = w * (1+JCTC/(1+r)) (increases UCL) FOC L2: F’[L2] = UCL2 = w * (1- JCTC+JCTC/(1+r)) = w * (1- JCTC* (r/(1+r)) (decreases UCL)

19. Empirical Predictions REGIME Delayed Immediate INTERVAL Before - N/A At ++ + After-Early + or - + or - After-Late 0 or - 0 or + Total + +

20. Empirical Work -- Specification Event Study Model:

21. Empirical Work -- Specification Event Study Model: 22

22. Empirical Work -- Specification REGIME Delayed Immediate INTERVAL Before γBEFORE At γATδAT After-Early γAFTER-EARLY δ AFTER-EARLY After-Late γAFTER-LATE δ AFTER-LATE Total Sum of γ’s Sum of δ’s

23. Empirical Work -- Preliminaries • Logit Regression: Prob[Adopt JCTC : No prior JCTC] NOT Related to employment growth • Employment data (monthly) has a unit root

24. Empirical Work -- Preliminaries Logit regression with state fixed effectsDep Variable: Prob[JCTC Signing | not having JCTC]

25. Empirical Work -- Preliminaries 26

26. Empirical Work -- Baseline Results coefficient, (standard error), [p-value]

27. Empirical Predictions REGIME Delayed Immediate INTERVAL Before - N/A At ++ + After-Early + or - + or - After-Late 0 or - 0 or + Total + +

28. Empirical Work – Other Results • Replace JCTC = tax credit rate with JCTC = indicator variable • Multiply JCTC by % Eligible Firms (≈94%) • Divide data by JCTC characteristics (refund) • Econ development vs. countercyclical • If former, then our estimates upper bound because of tax competition • Residuals from model (unexplained employment growth) for bordering states regressed on JCTC • Negative effect expected.

29. Policy Implications -- Obama’s Proposal • $4,000 for long-term unemployed • Average wage is $40,000 • 10% reduction in wage in one year • Effective JCTC • = 0.10 * (r / (1+r)) * Eligibility = 0.06 • Labor Growth = 0.06 * 0.35 = 0.02  280,000 jobs  ↓ unemployment rate by 0.1 % points

30. Conclusions Average employment effect on impact is small ...and largely due to intertemporal substitution in states with implementation lag (compare Delayed and Immediate regimes) But small effect is due to small effective credit rates, (r / (1+r)) modest elasticities of L w.r.t. the JCTC (0.35)

31. Conclusions Obama’s proposal would lower unemployment rate by 0.1 percentage points This study is NOT paid for by Mitt Romney’s presidential campaign Does have broader implications about the use of tax incentives.

32. Thank You

35. Empirical Work -- Preliminaries Logit regression with state fixed effectsDep Variable: Prob[JCTC Signing | not having JCTC] 36