Friday, May 7, 2010

Cash for Jobs: Wage Subsidies

This economic recession has inspired several interesting governmental programs to speed up recovery including: Cash for Clunkers, Cash for Caulkers, and in January, Al Franken introduced the new SEED Act, also known as Cash for Jobs. Cash for Jobs is a wage subsidy program that would help small and medium sized business and non-profit organizations employ individuals who have exhausted their unemployment insurance payment. Cash for Jobs comes at a time when the national unemployment rate is 10.2% (in Minnesota, the rate is 8.2%) and has quite a bit of support.

Wage subsidies have been used in the past to address unemployment and economic development during recessions. SEED is modeled after one of the most successful of these programs--the Minnesota Emergency Employment Development (MEED) act that was in place between 1983 and 1987.

This type of solution can been as more of a market approach. The primary advantage of this method is its simplicity in encouraging the private sector to employ disadvantaged members of the population and its ability to assist the unemployed relatively efficiently and quickly.

There are also disadvantages to this approach of addressing unemployment. These programs can have a high cost per job and previously, have only resulted in a relatively modest amount of jobs created . There is an additional concern of the program having a high windfall wastage, or that the subsidy would go to many employers who would have hired new positions even without government assistance.

The program provided a subsidy of four dollars an hour for wage and up to an additional dollar per hour for fringe benefits. The subsidy lasted for six months but employers participating in the program were required to retain the worker for a minimum of a year, or return a portion of the subsidy to the State. Eligible placements included both public sector (government jobs) and private sector employers. Because the wage subsidies were meant to be directed at the private sector, government jobs had slightly different requirements. First of all, they were primarily to help participants gain work experience. Although the subsidy lasted for six months, there was no requirement to keep the worker for the additional six month period. In addition to direct wage subsidies, there was limited funding for activities such as job search assistance, child care, and transportation.

The Jobs Now Coalition performed several evaluations of the MEED program and found the program to be highly successful for local and state governments, private companies and unemployed Minnesotans.

Some statistics:
30,000 Minnesotans participated in the program in its first phase (1983-1985)
15,00 were able to find unsubsidized employment in the next 2 years
9,500 permanent jobs were created
$37 million of the original $100 million invested was returned through income tax revenue and savings from General Assistance and GMAC
59.5% of businesses surveyed said they would not have been able to expand (or would have delayed expanding) without MEED

By all accounts, MEED was a successful program that helped the State and its residents recover from a difficult economic recession. Wage subsidies were crucial to providing employment and income to Minnesotans and provided opportunity for small businesses to not only survive, but expand as well. It created permanent employment and provided important work experience for disadvantaged individuals. It was administratively simple and able to recapture at least part of its initial investment. At least according to anonymous surveys, most companies would not have been able to hire new employees without government assistance. To aid communities, small businesses, and individuals, wage subsidies do seem to be an appropriate expenditure for governments, at least during an economic crisis.

However, MEED was partially successful because of the State’s timely response to the recession. As the economy recovered, the program still provided benefits, but not as impressive as they were during the first phase of the program. Perhaps wage subsidies are most successful when used for emergency recovery. This is an important factor for the US Senate to decide when evaluating the potential of SEED.

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