Target an Industry to Stimulate Demand (continued)

These programs are definitely successful in doing what they are drafted to do which is to provide the required impetus to the targeted industry or sector. However intervention in such way does not expand the whole economy. These programs maximum end up reviving only a small portion of the economy. The proposed Cash for Caulkers program would definitely give building contractors a boost but construction industry represents only a small portion of the economy. Again to help another sector of the economy the government will have to work out a new program. Also all these program have an expiry date after which there is that inevitable fall in demand. After the end of cash for clunkers discounts car manufacturers registered a decline in demand.

Economic incentives to Companies to Hire People

Another way the government can create jobs at least in the short run is by paying companies to hire people. The government can incentivise either by making a flat-out payment to companies to hire, or by cutting their share of payroll taxes which is the money that gets deducted from workers’ pay checks to pay for Social Security and Medicare. This method was tried in the 1970s by introducing a tax credit for hiring. The results were not too great because the method was not the ideal one.

The intention here is to accelerate the way an economy naturally comes out of recession. With less demand for goods and services companies hesitate to employ. They try to increase productivity of their existing work force instead to maintain the current level of production. This is something which we are currently experiencing. By paying companies to hire we are effectively making them to add employees and hence moving into the next phase of recovery.

But are these measures really effective in bringing the economy out of recession. First of all, it is not right to say that companies are not employing because labour is expensive. Data shows that labour is real cheap now. Unit labour costs which is the amount that a company has to pay people to produce a unit of final good is more or less constant or falling in 2009. Labour cost declined at an annual rate of 2.5% between the second and third quarters of 2009 which from the cost point of view amounts to a labour boom.

Also is it right to say that the companies are not hiring. On an average per month about 4 million workers are being hired. Hence if we use tax money to subsidize corporate hiring we effectively would only be paying for those 4 million hires a month that otherwise we would have got for free.

Read more at: Can Mr Obama Really Create Jobs- Part I