Posner and Becker on Obama’s Job Subsidy Plan

Posner’s comments:

The President is asking Congress to enact a one-year $33 billion job-subsidy plan. An employer would receive a $5,000 tax credit in 2010 credit for increasing his labor force by one person and an additional subsidy for giving an employee a wage increase greater than the inflation rate. The total subsidy would be limited to $500,000 per employer, in the hope that the principal recipients would be small businesses. I do not know why the ceiling should be expected to have that effect. Even big businesses like $500,000 windfalls. If a big business happens to be increasing its hiring or its wages, why wouldn’t it claim the subsidy?

That point to one side, and disregarding also the abundant possibilities of gaming the program, stressed by Becker, the proposal is unlikely to be effective because it violates the economic principles that ought to guide stimulus programs.

Becker’s comments:

The subsidy proposal gives small business some incentive to fire some employees, and then later to replace them with unemployed workers for whom they can collect the subsidy.

The unemployed hired under the subsidy program would likely receive higher pay than they would get otherwise because companies compete for these workers to qualify for the subsidy. Some workers might then remain unemployed rather than accept jobs in order to get the higher pay after the program is implemented. Employed workers at small (and even large) businesses might quite their jobs and become unemployed in order to become subsequently employed at other small companies in order to become eligible for any higher wages received by new hires.

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