Thank you Howard for your thoughtful comment. I will address two issues: (A) How to interpret Perloff and Wachter’s results and (B) What we learn from interrupted time series analysis of employment growth rates for different industries. (A) As P&W and I both pointed out, endogeneity of knowledge about the NJTC may inflate Perloff and Wachter’s estimate of NJTC’s effect on employment in February 1978. However, there are also biases that cause their results to understate the effect of NJTC . Some of P&W models controlled for sales growth during 1977, a variable that theory predicts should have itself been influenced by a NJTC that lowered the marginal cost of labor by 22+ percent. Even more important is the fact that P&W are only studying the first year of NJTC’s operation. Their survey was conducted in February 1978, eleven months prior to the programs expiration. Employer knowledge of the credit grew rapidly during 1978. Only 48 percent of NFIB members knew about NJTC in January 1978. Six months later 73 percent knew about the credit and claimed responses to the Tax credit had grown. (B) Theory makes a host of predictions about the likely effects of a tax credit structured like 1977-78 NJTC: 1. Private employment growth should accelerate as knowledge of the credit grows. 2. Growth of private employment should slow and possibly reverse after the credit ends. 3. Industries eligible for the credit should grow more rapidly than industries that are ineligible for the credit. 4. Since the NJTC was a higher portion of labor costs at low wage firms and at employers with high turnover, low wage industries with high turnover should have grown more rapidly during 1977-78 than other industries. 5. During the NJTC period, part-time employment should have increased more rapidly than full-time employment and average hours worked per week should decline. 6. NJTC advantaged new firms relative to existing firms, so industries where new firm formation is substantial (eg construction) should have grown particularly rapidly during the NJTC period. 7. The $100,000 cap on the size of a firm’s NJTC credit significantly reduced the incentive effects of NJTC on firms employing a thousand employees or more. Industries dominated by small firms should therefore have grown more rapidly during 1977-78 than industries dominated by large firms. 8. NJTC should cause price-cost margins to narrow in industries where labor costs are a significant share of sales prices. When I compared industry specific growth rates before, during and after the 24 month period of the NJTC, all eight of these hypotheses were supported by the data. 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. 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. Private employment grew by an impressive 7.4 million jobs or 11.1 percent during the two year period (December 1976 to December 1978) the NJTC was in effect. Only entry into World War 2 and the Korean war and demobilization at the end of WW2 generated higher two-year rates of private job growth. Industries not eligible for the NJTC—government and private colleges and universities-- grew at a significantly lower rate 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. 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. In my view these diff-diff tests build a solid case that NJTC boosted employment growth. Indeed, they also support Emil Sunley’s view that the 1977-78 NJTC was poorly designed and caused many distortions. The lesson I draw from the 1977-78 experience is that marginal employment tax credits have powerful incentive effects and must be very carefully designed to minimize unwanted distortions while achieving desired impacts on total employment.