Wednesday, August 3, 2011

Ineffective policy recommendations.

I heard an important story on Market Place today. The story highlighted the long lasting negative impact that a slow start to one's career can have. Recent grads--and by recent we mean 2008 onwards--are having trouble entering the workforce, and hence we've handicapped a generation. Ok, this story is pretty well known, but it's good to hear it publicized.

What blew me away was the solution: "We could, for example, exempt workers under 25 from paying their share of the Social Security payroll tax."

Something tells me that he doesn't fully understand incentives. When unemployment for a group is nearly double the national average, you can safely infer that the problem is not a lazy workforce. Cutting taxes on workers might increase the supply of workers, but it will do nothing to increase demand for them. Oh, and to get back to intertemporal smoothing, a member of the workforce may reasonably see the recent behavior by the government as a willingness to reneg on social security, and may further interpret specific cuts in their payroll tax as a chance to exclude them from future benefits. This reduces their incentive to rack up working years (even at a low wage), and may actually have the exact opposite impact of what he intends.

Cutting the employer portion of the payroll tax may be a different story, but the reality is that the marginal cost of a recent grad is already pretty low. Making additional employees profitable would do a lot more.

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