Continued response to Question 1
This question is based on the premise that when a state or local economy is economically distressed, all the employers in that state or local economy are reducing employment and will continue to do so in the future. If this premise were true, then the Job Creation Tax Credit would not be of much help in economically distressed states or local areas. If all employers are contracting, a credit for additions to jobs is not of much relevance.
However, there is great diversity in any labor market in the economic fortunes of employers. Even in a high unemployment labor market, there are many employers whose employment is unchanged or increasing, Furthermore, if employment has recently contracted in an area, there are more opportunities for employment expansion using the existing capital stock.
Consider my home state, Michigan. In the latest state unemployment rate statistics from the U.S. Bureau of Labor Statistics, for September of 2009, Michigan had the highest state unemployment rate, at 15.3 percent.
Even though Michigan’s economy is quite troubled, there are a considerable number of employers that are opening or expanding. For example, the latest data from the Business Employment Dynamics database of the U.S. Bureau of Labor Statistics, from the fourth quarter of 2008, indicates that 24.4 percent of all private sector establishments in Michigan opened up or expanded during that quarter. The comparable figure for the U.S. was that 25.1 percent of all private establishments opened up or expanded during that quarter.
These openings and expansions during the fourth quarter of 2008 were 5.9 percent of Michigan’s private sector employment. The comparable figure for the U.S. was 6.0 percent.
The numbers for Michigan can be plugged into the model developed by Bishop and me to simulate the effects of the Job Creation Tax Credit. The tax credit will be slightly less effective in Michigan because slightly fewer employers will find the tax credit relevant. However, the difference in effectiveness is small. In Michigan, I estimate an effect in 2010 of boosting employment by 2.22 percent, versus 2.28 percent in the U.S. The 2011 effect is 1.76 percent in Michigan, versus 1.81 percent in the U.S. The cost per job created is also higher in Michigan, but only very slightly. The gross cost per job created in 2010 increases from $28,116 in the U.S. to $28,415 in Michigan. The 2011 gross cost increases from $29,761 in the U.S. to $30,112 in Michigan.1
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