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

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

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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”


MotivationImportant 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

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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)

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0

2

4

6

8

10

12

14

16

18

20

22

24

Number of States with a JCTC (Jan. 1990 - Aug. 2009)


Motivation

• In this paper, we collect data on, and analyze effects of, these state “experiments”

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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


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


Data -- BackgroundJob 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)


Two sets of JCTC states – “regimes”:

1. Immediate

Qualifying Date < Signing Date– Retroactively or concurrently

2. Delayed

Signing Date < Qualifying Date– Implementation lags exist before net job gains

qualify– “Ashenfelter Dips” in Labor and “Fiscal Foresight” in

Macroeconomics

Data -- Background


Change in notation

1. Immediate = Retroactive + Concurrent

2. Delayed = Implementation

Data -- Background


-300 -240 -180 -120 -60 0 60 120 180 240 300

Illinois

Colorado (2006-2008)

Georgia

Maine

Virginia

Idaho

Indiana

North Carolina

Michigan

Maryland

Vermont

Louisiana

Pennsylvania

Arkansas

Tennessee

Oklahoma

Ohio

Colorado (2009)

New Mexico

Rhode Island

Connecticut

Nebraska

West Virginia

Days

Time from Signing Date (tS) to Qualifying (tQ) Date for JCTCs

Implementation

Retroactive

Concurrent


JCTC Adoption Exogeneity

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Theory


• 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

Some Theoretical Guidance

INTERVALS

“BEFORE

“AT”

Period between signing and qualifying dates

First period at which credit is both known and in effect – i.e., later of signing and qualifying dates

“AFTER” Periods after the “AT” period.


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)


tQ tS

Z

A

B

C

D

E

F

BEFORE INTER AT AFTER

Em

plo

yme

nt

Time

Concurrent or RetroactiveRegime

Labor subsidy effect,"True" JCTC effect


tS tQ

Z

A

B

C

D

E

F

BEFORE INTER AT AFTER

Em

plo

yme

nt

Time

Implementation Regime

Deferred Hiring

Inventory replenishment,Temporary overshooting

Labor subsidy effect,"True" JCTC effect

Return to new steady-state


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

+ ………………….


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)


Empirical Predictions

REGIME

Delayed Immediate

INTERVALBefore

- N/A

At ++ +

After-Early + or - + or -

After-Late 0 or - 0 or +

Total + +


Empirical Work -- Specification

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Event Study Model:

i,t i,t 1 i,t

P P1 i,t i,t 1 2 i,t

i t i,t i,t

L / L JCTC

L / L COMPETITION

LT



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Event Study Model:

IntervalJ

i,t i,t jj 1

Multiple periods for each interval

JCTC JCTC



REGIME Delayed ImmediateINTERVALBefore γBEFORE

At γAT δAT

After-Early γAFTER-EARLY δ AFTER-EARLY

After-Late γAFTER-LATE δ AFTER-LATE Total Sum of γ’s Sum of δ’s


Empirical Work -- Preliminaries

• Logit Regression:

Prob[Adopt JCTC : No prior JCTC]

NOT Related to employment growth

• Employment data (monthly) has a unit root



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Logit regression with state fixed effectsDep Variable: Prob[JCTC Signing | not having JCTC]

(1) (2)Employment growth over prior 12 months 0.066

(0.083)

Employment growth over prior 12 months, relative to neighboring states

-0.119(0.114)

Fraction of neighboring states with JCTC as of 12 months prior

0.041 0.037(0.021) (0.018)

Republican governor and/or legislature(1=both, 0.5=split, 0=neither)

-0.002 -0.003(0.006) (0.005)

Capital Taxes (User cost of capital) -0.636 -0.528(0.021) [0.021]



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Properties of Li,t

(monthly data)

Unit root test ΔLi,t / Li,t-1


Empirical Work -- Baseline Results

coefficient, (standard error), [p-value] REGIME

INTERVALS

Delayed (1)

Immediate (2)

Before -0.691 --------- (0.638) --------- [0.278] --------- At 0.566 0.042 (0.188) (0.011) [0.003] [0.000] After-Early -0.215 0.104 (0.308) (0.031) [0.484] [.001] After-Late -0.162 0.201 (0.707) (0.099) [0.819] [0.043] Sum -0.504 0.347 (0.956) (0.091) [0.598] [0.000]


Empirical Predictions

REGIME Delayed ImmediateINTERVALBefore - N/A

At ++ + After-Early + or - + or -After-Late 0 or - 0 or +Total + +


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.


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


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)


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.


Thank You





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Logit regression with state fixed effectsDep Variable: Prob[JCTC Signing | not having JCTC]

(1) (2)Employment growth over prior 12 months 0.066

(0.083)

Employment growth over prior 12 months, relative to neighboring states

-0.119(0.114)

Fraction of neighboring states with JCTC as of 12 months prior

0.041 0.037(0.021) (0.018)

Republican governor and/or legislature(1=both, 0.5=split, 0=neither)

-0.002 -0.003(0.006) (0.005)

Capital Taxes (User cost of capital) -0.636 -0.528(0.021) [0.021]

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