Summary of Research on Impacts of the 1977-78 NJTC In 1977 and 1978 firms that increased employment by at least 2 percent received a tax credit of 50% of the increase in each employer’s FUTA wage base (sum of wages paid up to $4200 per employee) under the Federal Unemployment Tax Act above 102 percent of the previous year’s FUTA wage base. The marginal wage and salary cost of employing additional non-supervisory workers at an existing firm (earning the mean weekly wage) was reduced by 21 percent. The net after tax cost of hiring additional part time workers and minimum wage workers was reduced by more than 40 percent. The NJTC was not signed into law until June 1977 and the Treasury and other public agencies did little to publicize and promote it. Consequently many small employers were not aware that expanding employment would reduce their tax liability. A National Federation of Independent Business survey found that only 43 percent of their members knew of the credit in January 1978. By July 1978, 68 percent were aware of the credit and 4.1 percent said they had increased employment (by an average of 2.3 workers) in part because of it. If these NFIB respondents are representative, multiplying these figures by 3.5 million (the total number of employers in 1977), produces an estimate for July 1978 of about 300,000 extra jobs created as a result of the NJTC (McKevitt 1978). A Bureau of the Census survey of a stratified random sample of firms achieved a much higher response rate than the NFIB survey. The Census survey’s estimate of employer awareness of the NJTC and of the response to it were also larger. Perloff and Wachter (1979) used the Census data to compare the rates of employment growth in 1976 and 1977 of firms that knew about the credit and those that did not. Controlling for sales growth and other firm characteristics, they found that the employment of the firms that had already heard of the credit had grown three percent faster in the preceding year than at the firms that were unaware of it. If you multiply the 3 percent figure by employment at small firms that knew about the credit, the total number of extra jobs in February 1978 was roughly 700,000. Since NJTC passed Congress only 9 months before, this would be an impressive number. Perloff and Wachter viewed their results “as an upper bound on the short run impact of the program” because some of the firms may have learned about the credit because they were growing rapidly. Another source of uncertainty about the size of the aggregate stimulus comes from the knock-on effects of one firm’s expansion on suppliers, distributors and competitors and the effect of reduced marginal costs on pricing and sales. Many of these displacement effects are netted out when industries (not firms) are the units of observation, so interrupted time series studies of industry employment are potentially informative. Bishop and Haveman’s time series analysis of employment in construction and distribution industries from 1952 through the third quarter of 1978 concluded that employment growth had accelerated during the 15 month period following the passage of the New Jobs Tax Credit legislation (Bishop 1981, Bishop and Havemen 1979). Consistent with theory, NJTC’s ‘impacts were larger for part-time jobs than full-time jobs. Hours worked per week in retailing fell in 1978. Theory predicts that a temporary marginal employment subsidy should lower marginal costs and increase price competition. Bishop (1981) found that margins between retail and wholesale prices in restaurants and other labor intensive retail sectors were declining during 1977-78. Private employment grew by 7.4 million jobs or 11.1 percent during the 24 month period (December 1976 to December 1978) the NJTC was in effect. Only entry into World War 2 and Korea and demobilization after WW2 have generated larger 24 month rates of private job growth. Industries not eligible for the NJTC—government and private colleges and universities-- grew at significantly lower rates during 1977 and 1978. Growth was particularly rapid in industries with many small firms: 18 percent in construction, 10.9 percent in retail trade, 10.8 percent in professional and business services and 11.2 percent in physicians offices. A limitation of $100,000 on the amount of the credit any one firm could receive reduced its incentive effects for very large firms. Consistent with that hypothesis, growth rates in 1977 and 1978 were lower in industries dominated by large firms--6.6 percent for utilities and 8 percent for manufacturing. The unemployment rate which had stagnated between 7.6 and 7.9 percent in 1976 dropped two percentage points to 5.9 percent in the final quarter of 1978. What happened after the NJTC expired in December 1978? The growth of private employment slowed to 1.8 percent during the next six months and then stopped altogether. By the third quarter of 1980, the unemployment rate had returned to its 1976 level of 7.7 percent. Was this due in part to an unwinding of the NJTC’s employment stimulus? Possibly, but we will never know because the American economy experienced two huge shocks—a doubling of oil prices (after the February 1979 Iranian Revolution) and the Federal Reserve’s adoption of a tight monetary policy on October 1979—that would defeat any effort to tease out the effect of a NJTC phase out. Unemployment reached 10.6 percent in the fourth quarter of 1982. Overall, about 1.1 million of the nation’s 3.5 million employers (probably more than half of profitable eligible firms) claimed a credit on their 1978 return. The face value of the 1978 credits claimed was $4.513 billion for a net cost of roughly $3.1 billion dollars (a 0.69 percent reduction in federal tax revenue in 1978) or about 0.13 percent of GDP in that year. Extrapolating from Bishop (1981) and Perloff and Wachter (1979), the NJTC probably generated at least a million jobs by the end of 1978. The average earnings of non-supervisory workers was $10,946, so adding a million jobs would have increased total labor compensation (including fringe benefits, pension contributions and the employer share of SSA taxes) by roughly 13.5 billion dollars. That would make the first-round bang-for-buck about 4.35 to 1. If the marginal propensity to consume U.S. goods and services out of total compensation is 0.50, the Keynsian multiplier for the 1977-78 NJTC would be about 8.7, more than five times Mark Zandy’s (2008) estimate of 1.59 for the infrastructure multiplier. Despite its very significant implementation problems and distortions, the 1977-78 NJTC clearly had substantial effects on employment growth. Would a marginal employment subsidy implemented in 2009 and 2010 be as successful? Conditions are different. We are now heading into a recession trough, not climbing out of one. The problem is stag-deflation, not the stag-inflation of the 1970s and early 80s. Many credit markets are frozen. Skeptics ask “How will entrepreneurs finance additional employees, if credit is unavailable.” But external financing was also difficult in 1977 and 1978. The cost of equity capital—the earnings to share price ratio of the S&P500--was 10.8% in 1977 and 12.0% in 1978 compared to 7.8% at the end of November 2008. Interest rates on Baa rated corporate bonds were also higher in 1977 than in November 2008. The most important difference between then and now is that the lessons of the 1977-78 experience can improve the design and administration of a 2009-10 NJTC and the internet allows us to more rapidly inform employers of its features. For graphs of data and lessons go to http://digitalcommons.ilr.cornell.edu/articles/184/