Chirinko & Wilson 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
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Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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 - PowerPoint PPT Presentation
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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”
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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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Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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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Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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Number of States with a JCTC (Jan. 1990 - Aug. 2009)
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
Motivation
• In this paper, we collect data on, and analyze effects of, these state “experiments”
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Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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)
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
Change in notation
1. Immediate = Retroactive + Concurrent
2. Delayed = Implementation
Data -- Background
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
-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
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
JCTC Adoption Exogeneity
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Theory
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
• 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.
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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)
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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
+ ………………….
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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)
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
Empirical Predictions
REGIME
Delayed Immediate
INTERVALBefore
- N/A
At ++ +
After-Early + or - + or -
After-Late 0 or - 0 or +
Total + +
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
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
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
Empirical Work -- Specification
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Event Study Model:
IntervalJ
i,t i,t jj 1
Multiple periods for each interval
JCTC JCTC
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
Empirical Work -- Specification
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
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
Empirical Work -- Preliminaries
• Logit Regression:
Prob[Adopt JCTC : No prior JCTC]
NOT Related to employment growth
• Employment data (monthly) has a unit root
Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States
Empirical Work -- Preliminaries
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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