Why a Hiring Tax Credit May Not Help

Lawmakers are considering a new tool, but it won't solve the real problem.

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Here's a startling fact about the job market: Between August and September, New York lost 82,000 jobs, the Labor Department reported today. Texas lost 45,000 jobs. California lost 39,000, and Wisconsin lost 22,000—roughly as many as Michigan lost.

It is remarkable that this far into a recession, employers are still slashing payrolls. Not a single state registered a statistically significant increase in employment over the month. Millions of job seekers well into their job searches are wondering when companies will stop cutting jobs and start hiring again. Lawmakers in Washington are looking at options to encourage hiring, but those incentives may have little impact on the real issues keeping employers from adding to payrolls.

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It's understandably confusing for job seekers to see the great improvement in corporate profits, the outstanding performance of the Dow Jones industrial average, and promising signs of economic recovery elsewhere even as the unemployment rate continues to rise. In many cases, however, corporate profits have improved not as a result of increased sales but because of decreased expenses—often caused by a reduction in payroll costs. For companies to begin hiring, they must have confidence there will be sufficient future demand to make the hire worth the investment. That's why some in Washington are suggesting a new-hire tax credit that would offset the expense—and risk—of adding an employee to the payroll.

Sen. Arlen Specter, for one, touts a couple of possible versions of the tax credit—a $4,000 credit per new hire, paid out over two years, or a two-year credit valued at double the first-year payroll tax. "Tax credits would add another weapon to the government's arsenal in its battle against joblessness," Specter says.

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But companies are not refraining from hiring because they have low confidence in the economy's future. Rather, companies add staff when they need people—when heightened demand warrants the additional workers, says Joshua Shapiro, chief U.S. economist at MFR. Cheapening the cost and lowering the risk of a new hire still doesn't solve the demand problem. It will take time for demand to grow enough for companies to really ramp up hiring. In the near term, "a lot of things are going to weigh on demand," Shapiro says, including troubled household balance sheets and a slowly recovering banking system.

Molly Brogan, a spokeswoman for the National Small Business Association, says that the prospect of a hiring tax credit would be interesting but would not necessarily be a major incentive to hire. "When we talk to our members about whether this would be a catalyst for hiring, we're not hearing a lot of them say 'yes,' " Brogan says. The tax credits would, as currently suggested, last two years, while hiring costs are much more long term. Small business owners also face tough credit markets. Many have seen their credit scores and limits fall since the start of the recession, and getting the financing to fund growth is much more difficult, Brogan says.

The first step is to see a significant slowdown in payroll cuts. A new report from the Society for Human Resource Management shows most employers don't intend to change their payrolls much in the fourth quarter. About 20 percent of HR professionals surveyed said their organizations intend to hire new workers in the final quarter. A slim margin of professionals—14 percent—said their companies planned to cut jobs during the period.

"HR managers are optimistic that the economy is inching towards a recovery but are crafting cautious hiring plans with more aggressive recruitment not expected until 2010," says Jennifer Schramm, manager of workplace trends and forecasting at SHRM.