Payroll Tax Cut: How Many Jobs?

How many jobs will a payroll tax holiday create?

A simple question… a basic question… yet not easy to answer.

The whole payroll tax holiday issue is based on the bipartisan belief that it will create jobs through consumptive stimulus.

Is that true? Will it? If so, then how many jobs?

Those are very much open questions.

It doesn’t help that even respected publicly-funded research institutions aren’t always reliable.

Case in point: UMASS – The University of Massachusetts – Amherst

Despite their unreliability, a best guess estimate of direct job creation will be made based on solid data.

What is PERI?

A good example of bad research that lawmakers often depend on for crafting legislation – like payroll tax holidays – comes from places like this macroeconomics research institution at UMASS-Amherst:

Policy Economy Research Institute(PERI)
– UMASS-Amherst, Robert Pollin and Gerald Epstein, Co-Directors

PERI’s stated purpose is:

translate what we learn into workable policy proposals that are capable of improving life

The suspect research is summarized in a very well-prepared document published just this month:
THE U.S. EMPLOYMENT EFFECTS OF MILITARY AND DOMESTIC SPENDING PRIORITIES:
2011 UPDATE

– Robert Pollin and Heidi Garrett-Peltier, UMASS, December 2011

Though not specifically directed toward a payroll tax holiday, it has the number we need.

Unfortunately, it also shows how difficult it is to get reliable data for lawmakers to make policy decisions and craft legislation.

The World Through Rose Colored Glasses

Jobs Created per Billion Dollars Spent (Source: PERI at UMASS-Amherst)

This bar graph is beautiful, clear, concise, easy to understand… and WRONG!

It shows the number of jobs created in various employment sectors for a $1 billion dollar investment.

For example, each investment of $1 billion creates 27,700 education jobs; or 17,200 health care jobs; or 16,800 clean energy jobs.

The very best part of all about this graph is lawmakers could use the 15,100 jobs created from “Tax cuts for personal consumption” to calculate the number of jobs created for the payroll tax holiday!

That would be great!

Lawmakers could then use that number for an accurate bang-for-the-buck assessment of the cost of a payroll tax holiday.

The payroll tax holiday, in HR 3630, is a tax cut specifically designed to generate personal consumption!

Extrapolating to a full year from the latest CBO analysis, the payroll tax cut proposal before Congress is for: $122.4 billion in direct stimulus for one year.

A UMASS-Amherst Payroll Tax Cut Jobs Forecast

Using the UMASS “personal consumption” figure the payroll tax cut would create 1.8 MILLION jobs for one year. That would be an amazing boost to the economy, to say the least!

The reason for this unrealistically high number is the study authors erroneously assume a near dollar-for-dollar translation of tax cut money into direct job creation. Things don’t work that way in the real world.

Later a more realistic estimate will be made based on recent ARRA grant spending.

How Much Do Created Jobs Cost?

Cost per Job (Source: PERI at UMASS-Amherst)

On the very same page as the bar graph above is this table outlining the average cost per job for the various employment sectors of the economy. That data comes from BEA.

For example, accounting for both wages and benefits, the average cost of a military job is $90,776; the average for education $72,246; and health care is $68,978.

The estimated “tax cut for personal consumption” cost per job is $62,725. That, presumable, would be the average cost of a job created by the payroll tax holiday.

Those jobs would be created in every sector of the economy.

—————————————————————————————
An Aside:

There is more to economic stimulus than meets the eye.

Each job created has a cascading benefit that ripples down throughout the economy. A new teacher earning about $50K spends that money which supports whoever supplies the goods and services the teacher buys; which, in turn, creates jobs in their industry, etc., etc.

Basically, one new job will create others. Figuring the full effect of a payroll tax cut should take all that into account.

But for our purposes we will concentrate only on direct job creation.
—————————————————————————————

The House of Cards Falls

At a cost of $62,725/job for a payroll tax created job, the 15,100 jobs claimed by PERI would cost $947 million total in direct wages and benefits.

That is less than a billion. Sounds reasonable. Right? WRONG!

This leaves only $53 million for non-job related overhead costs. That sounds like a lot, but is so far out-of-whack from the real world that the whole 15,100 jobs created figure is called into question.

How do we know that?

Fortunately, there is a ready-made, real-life example of costs per job available to us as a model. It is even government doing the spending!

It is analogous to the same consumptive spending expected from a payroll tax cut.

It is – surprise! – 2009’s famous ARRA recovery act… the “Stimulus” package!

Where is the Money Going?
-Recipient Projects Map, www.recovery.gov, 12/14/2011

According to ARRA we spent $278 billion and “created or saved” 402,900.11 jobs. Each cost a WHOOPING $688,785/job!

A little closer inspection shows that most of the outlays were for “grants” at a cost of $220 billion for 350,000 jobs.

It just so happens that about 320,000 of those jobs are teacher jobs that were mostly saved, not created. That according to the National Education Association.

The “grants” type spending is our closest ideal real world example to what we could expect from a payroll tax cut.

Grants were mostly saved jobs and used primarily to fund teachers, first responders and “shovel ready” jobs at an average cost of $626,771/job!

In the biz, we pros call that a chunk of change!

Given the combined cost of wages and benefits for the average job in the United States, the associated overhead cost is 9 times higher than the job it created or saved. That’s a lot!

However, it is the standard that should be applied to direct job creation numbers for a payroll tax cut.

Some argue those ARRA numbers are inaccurately reported. However, it is unreasonable to believe that entities competing for federal grants specifically allocated for job creation would under report their figures. If anything they might inflate their figures to get more federal money.

For ARRA, that leaves us with $564,046 in non-job related overhead costs PER JOB!

ARRA is a remarkable testament to the inefficiency of federal direct job creation efforts.

Lets Get Real!!

PERI, an academic think tank, would have lawmakers believe they would create 1.8 million jobs if they extend the current tax holiday through 2012. That just isn’t true.

According to the BLS, total non-farm job growth for 2011, so far, is 1.4 million jobs. Job growth, albeit slowly, has been steadily upward throughout the year.

It looks like, with this year’s payroll tax holiday, that 2011 will end with about 1.6 million new jobs created.

Obviously, all that job growth did not come from this years payroll tax holiday. Most of it came from the private sector and the delayed effects of ARRA spending that ended last year.

In other words, this year’s payroll tax holiday, so far, has not had tons of real effect on this years job growth. Logically, doing the same thing in 2012 will have the same effect.

If we simply assume the ARRA figures, as is, then for our $122.4 billion dollars in tax relief we would create only 195 jobs in 2012! Yup, that’s right – 195 jobs!

That is unrealistically low. PERI is unrealistically high.

Conclusions

Both PERI calculations and ARRA calculations don’t meet the smell test for payroll tax cut job creation.

So, lets SWAG it!!! (Scientific Wild Azzed Guess)

It takes mind altering substances to conceive of this, but assume that government miraculously becomes more efficient at job creation in 2012. Lets say that instead of 9 times more for non-job related expenses in ARRA that it is only 4 times more for a 2012 payroll tax cut.

Plug and chug and you get 342,462 jobs created by the proposed payroll tax cut.

Now that’s better!!

That number can be applied to 2011’s payroll tax cut because they are exactly the same cut.

Of the 1.6 jobs created in 2011, we’d attribute 342,462 to the 2011 payroll tax holiday.

That number meets the “sensibility test” that all worthy SWAGs live by.

Sooo… that’s my way overly simplified story, and I’m sticking to it!

Instead of bickering, the real question lawmakers should be asking is this…

Is it cost effective to spend $122.4 billion to create 342,462 jobs at a cost of $392,464/job?

—————————————————————————————————————————————————————

Addendum:

Other related Social Security/payroll tax holiday articles can be found here:

Payroll Tax Cut: Victory for Obama?
-Azleader, Inform The Pundits!, 12/27/2011

2-Month Payroll Tax Cut Extension – Huh? What??
-Azleader, Inform The Pundits!, 12/19/2011

2012 Payroll Tax Cut Holiday Extension – Democrats vs. Republicans
-Azleader, Inform The Pundits!, 12/15/2011

Payroll Taxes: Good News/Bad News
-Azleader, Inform The Pundits!, 12/9/2011

Payroll Taxes… Change of Venue
-Azleader, Inform The Pundits!, 11/22/2011

The Systemic Demise of Social Security
-Azleader, Inform The Pundits!, 11/15/2011

President Obama’s Jobs Proposals
-Azleader, Inform The Pundits!, 9/1/2011

Don’t Extend the Payroll Tax Holiday
-Azleader, Inform The Pundits!, 8/21/2011

Extend the Payroll Tax Cut Holiday… into 2012?
-Azleader, Inform The Pundits!, 7/1/2011

Advertisements

About azleader

Learning to see life more clearly... one image at a time!

Posted on Dec 21, 2011, in ARRA, economics, Economy, Job Creation, Jobs, news, Payroll tax, payroll tax cut, Politics, Taxes. Bookmark the permalink. 1 Comment.

Comments and questions are welcomed!

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: