1. Cut pay for state, local, and Federal workers.
Many people worry about governments having to cut back on employment. They see this as an argument for higher government spending. However, it is actually a much stronger argument for cutting salaries of government workers. The advantage of cutting pay is that you can keep government workers employed without taking resources away from the private sector.
If you start to lose employees to the private sector, then you can raise pay to compete.
2. Cut the employer contribution to the payroll tax. In the short run, this will reduce labor costs and increase profits. This will lead firms to expand and to raise employment. In the long run, it will lead to higher wages. When recovery comes, you can either bring back the payroll tax or replace it with a less regressive tax.
READER COMMENTS
Ryan Vann
Dec 4 2009 at 2:04pm
1) Is already happening/has been happening for awhile on the state and local level (at least here in Florida), and doesn’t seem to be helping. If there were some sort of hiring tax incentive to offset the reductions, that might very well be effective, but then you have to worry about defecits.
2) Would be more politically feasible than 1, and would probably more effective. Unfortunately, instead of reductions in payroll taxes, what we are likely going to see is unemployment insurance taxes going up across the board (this is what we are doing in Florida), as benefits are being paid in record numbers. I believe 2010 is going to be an ugly year, partially due to this.
Peter
Dec 4 2009 at 2:09pm
Just a self interest plug but can’t say I like one .. I recently went federal civil service and def took a pay cut. The problem you are going to run into cutting pay is you lose top talent to the private sector. It’s already hard to get quality doctors, civil engineers, technocrats, mid-level management, and junior executives on low paying GS14/15 or SES pay scales; further cutting them is going to do nothing but further increase the bureaucratic ranks with private sector washouts and then folk (taxpayers) complain why they have such a shoddy government, because you don’t want to pay professionals to run things.
I would agree with low to mid level GS’s whose pay is often well above a similar private sector job but at the top its definitely reversed.
Ralph Musgrave
Dec 4 2009 at 2:33pm
Re cutting pay, Winston Churchill tried cutting coal miners’ pay in the 1920s. The result was a year long miners’ strike. The Irish government is currently trying to cut public sector pay. Same result: industrial unrest. As Keynes said, wages are sticky downwards.
Re cutting employer contribution to payroll tax, if this is done in a budget neutral way, there will be little effect. On the other hand if the cut is part of (or all of, come to that) an increase in the deficit, then jobs will be created. But a very similar result would come from feeding the additional deficit through any other channel, wouldn’t it?
Is this payroll tax contribution cut budget neutral or not? You need to make this clear, I suggest.
Charlie Quidnunc
Dec 4 2009 at 3:44pm
Ditto, already happening in the State of OR, where people have forced days off without pay, called “furlough days”.
Doc Merlin
Dec 4 2009 at 5:19pm
“The advantage of cutting pay is that you can keep government workers employed without taking resources away from the private sector.”
This statement is silly, as workers are also resources that are “taken away from the private sector.”
Michael Bishop
Dec 11 2009 at 8:10pm
Wouldn’t this be better?
http://economix.blogs.nytimes.com/2009/11/19/the-case-for-a-job-creation-tax-credit/
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