Can a hiring tax credit create 15 million new jobs?

It's hard to believe, but there are now 15.1 million people out of work. The $787 billion stimulus plan was supposed to "save or create" 3 million jobs, but there's little evidence that plan is having much of an effect. The sad thing is that even if those jobs were actually created, it would not be enough to make up for all the jobs lost in the recession.

However, something new is on the horizon: a tax credit to encourage small business to create new jobs. DailyFinance's Mark Cohen wrote about this last month, wondering why the government isn't using the tax code to help create new jobs. Now The New York Times reports that a growing number of experts and politicians, including 2006 Nobel Prize winner Edmund Phelps, are promoting a two-year tax credit for small businesses that increase the size of their work force or make part-time workers full-time. The tax credit -- which would amount to twice the first-year payroll tax for each new hire -- could be worth thousands of dollars per new job.

Exactly how many thousand dollars saved can be seen with an example given in the Times. Using the credit, a worker making $50,000 would actually cost the company $42,350 in the first year, $44,900 in the second year and $50,000 thereafter. The result is a total savings to the employer of $12,750.

A study by the American Economic Review suggested that in the 1970s a similar program created 700,000 of the 2.1 million jobs awarded the credit, according to the Times.

I am glad that the U.S. is trying to do something to help spur job creation. But I am a bit skeptical that this will create enough jobs, even if that study of how the program worked in the 1970s is correct. That's because in the current economic environment, companies will only hire new people if they conclude that they cannot satisfy demand for their products without the new hires.

And with capacity utilization at a low 69.6 percent -- 11 percentage points below average -- that means there's still lots of excess on the factory floor. If companies decide to cut out the excess, their former workers will add to the unemployment rate. Since consumers are 70 percent of GDP growth, that will mean less demand and potentially even more excess capacity, and more job cuts.

Rather than focus on deficit-boosting tax cuts, the U.S. should spur a particular kind of executive fear. That's because I think the economy works on two fears -- the fear of losing all your money and the fear of falling behind the competition.

We need more of that second fear if we hope to get companies to start hiring. The last time we had a wave of such fear among corporate executives was in the 1990s when companies invested in computer infrastructure to tap into what they feared would be the missed profit potential of the Internet if they did not invest. That investment created millions of jobs.

Unfortunately, a tax credit that saves a company with excess capacity a few thousand dollars on an employee that it would not otherwise hire is not going to help much with that.

Peter Cohan is amanagement consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.

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