Countercyclical Job Creation Programs

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To counter the effect of recessions on workers, Congress has passed legislation to spur job
creation through increased spending on public works (infrastructure) and public service programs,
revenue sharing with state governments, and employment tax credits. Although the economic ^th
stimulus measure enacted during the 110 Congress did not include these direct job creation
approaches, additional spending on infrastructure in particular was considered before Congress
recessed. (See CRS Report RL34349, Economic Slowdown: Issues and Policies, coordinated by
Jane G. Gravelle et al.) Infrastructure spending continues to be mentioned in the context of a
second stimulus package, as do state and local government revenue sharing and a jobs tax credit.
The focus of this report is on the four countercyclical job creation approaches and related ^th
legislation enacted since the Great Depression’s end. Legislation introduced during the 111
Congress that includes these approaches to job creation is addressed in other CRS reports.

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The Pros and Cons of Job Creation Approaches in Brief................................................................1
Countercyclical Public Works Employment....................................................................................2
Countercyclical Public Service Employment..................................................................................3
Countercyclical Revenue-Sharing...................................................................................................4
Countercyclical Employment Subsidies..........................................................................................5
Author Contact Information............................................................................................................6

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Public Works (Infrastructure) Programs. It often is argued that public works programs create
worthwhile, long-lasting tangible outputs (e.g., highways, bridges, water and sewer systems) and
teach workers marketable skills. Because implementation of infrastructure programs often has
been slow, however, they may increase the demand for labor when the economy already is
expanding and thereby drive up wages and the inflation rate. If funds mainly are devoted to
construction projects requiring expensive materials and equipment and utilizing high-skilled
workers, then public works might be a comparatively costly way to create jobs. Alternatively, if
funds are devoted to more labor-intensive projects (e.g., those involving maintenance and repair
of roads and bridges), more jobs could be created per dollar of spending.
Public Service Programs. Countercyclical public service jobs programs typically have been
quicker to startup than public works programs. In addition, a larger share of public service
expenditures go toward wages than materials and equipment. As a result, more jobs can be
created per dollar of spending on public service activities as compared to infrastructure projects.
Public service job creation programs also tend to help a broader range of workers by involving
more low-skilled unemployed workers. It commonly is claimed, however, that public service
programs impart few skills to participants and that participants engage in “make-work” projects
(i.e., activities that are not worthwhile).
Revenue-Sharing Programs. Revenue sharing can stabilize state and local budgets by giving
governments funds so they might avoid cutbacks in services or increases in taxes due to
recession-induced revenue shortfalls. Spending cuts or tax increases at the state or local level
could exacerbate a recession’s impact and offset federal counteryclical measures. It is asserted
that federal grants to governments can produce jobs fairly quickly if the money can be used for
general purposes and if neither new regulations nor new administrative entities are required. But,
if few strings are attached to the ways in which federal funds can be spent, there is a risk that
governments might use the funds for purposes that create fairly few new jobs (e.g., building up
cash balances).
Employment Tax Credits. Some analysts think that an employment tax credit is superior to public
employment approaches because the former offers subsidized jobs at private sector firms where
workers may learn skills that are more readily transferable to unsubsidized jobs. Other benefits
claimed for a jobs tax credit are that it neither requires a new government program nor an
administrative entity. Unless businesses believe there will be sufficient demand for their products,
however, they are unlikely to increase hiring despite the credit’s availability. And, faced with only
a temporary subsidy of their labor compared to capital costs, firms may be unwilling to change

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production techniques and shift their input mix toward greater use of relatively less expensive
workers.
One drawback that is common to each of these approaches is that they might not create any more
jobs than would have been created in their absence. For example, federal funds could be used to
pay for public works projects that state governments would have undertaken with their own
money. Similarly, employers could claim a tax credit for already anticipated hiring. However, the
likelihood of this occurring is greater if the programs are in effect when an economic recovery is
underway.

The Public Works Acceleration Act of 1962 (P.L. 87-658) created the Accelerated Public Works
(APW) program, the first effort in the post-World War II period to create publicly funded jobs in
construction and related private sector industries as a way to combat rising unemployment. In
addition to redevelopment areas designated under the Area Redevelopment Act, areas eligible for
assistance were those the Secretary of Labor determined had experienced substantial
unemployment (i.e., a jobless rate above 6%) for at least nine of the preceding 12 months. The
program, coordinated by the Commerce Department, was conducted through existing federal
agencies. It provided $852 million for such projects as water and sewer facilities, hospitals, and
street construction.
The APW program and subsequent public works programs have been criticized for their delayed
startup, which resulted in projects not being completed until well after a recession’s end. Some
observers have suggested that if there were a program already in place with prescribed triggers
for its initiation, the issue of timeliness would be resolved. In response, others have said that it
still would take time to allocate funds, award contracts, obtain materials, hire workers, and
complete the projects themselves.
The Local Public Works Capital Development and Investment Act of 1976 (P.L. 94-369, Title I)
and the Public Works Employment Act of 1977 (P.L. 95-28) appropriated $6 billion for the Local
Public Works (LPW) program. The Economic Development Administration allocated funds to
states on the basis of their unemployment levels and rates, and to substate areas, on the basis of a
complicated formula.
There was criticism that LPW funds were substituted for local funds that would have been spent
on similar projects in the absence of the federal program. The differing assumptions of analysts
about the extent of this practice (fiscal substitution) resulted in markedly disparate estimates of ³
the net number of jobs created by the program. In addition, the LPW program largely provided

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jobs for already employed construction workers. For the few unemployed persons who did get
jobs, the experience and skills acquired probably were minimal because the average length of
employment was short.
The Emergency Jobs Appropriations Act of 1983 (P.L. 98-8) was designed to deal with some of
the criticisms leveled at earlier job creation efforts. By appropriating additional funds to existing
programs with projects already underway, Congress expected that money would be spent and jobs
would be created comparatively quickly. According to an evaluation by the then General
Accounting Office (GAO), this was not the case. GAO also found that few jobs went to the
unemployed despite the law requiring that funds be used as much as possible to create jobs for the
jobless. P.L. 98-8 provided some $9 billion to 77 programs and activities administered by 18
federal departments and agencies. About 86% of the appropriations ($7.8 billion) went to 55
programs and activities that fund public works activities (e.g., construction, repair, and
maintenance of buildings and facilities). The remainder went to 22 programs and activities that
perform public service functions (e.g., the maternal and child health services block grant, the
social services block grant, and community health centers ($620 million); income support ($400
million); and employment and training assistance ($230 million)).
The Supplemental Appropriations Act of 1993 (P.L. 103-50) was signed into law in July 1993,
well after the 1990-1991 recession had ended. Like P.L. 98-8, P.L. 103-50 provided additional
funds for public works and public service programs (e.g., $166.5 million for summer youth
employment, $150 million for hiring police officers, $50 million for the Youth Fair Chance
program, $45 million for Amtrak’s operating losses and capital improvements, $35.5 million for
rural water and sewer direct loans, and $35 million for rural water and waste disposal grants).

The Public Employment Program (PEP), authorized by the Employment Act of 1971 (P.L. 94-
369, Title I), was the first sizeable ($2.5 billion) antirecessionary public service employment
effort since the Great Depression. The temporary program sought to provide public service jobs
for unemployed and underemployed persons. Funds were allocated to units of government based
upon the relative severity of unemployment. Funds were spent quickly, which meant that jobs
were created rapidly. The program was labor intensive, with a large share of the funds going
toward wages. Several studies found that many of the jobs subsidized by PEP would have existed
in its absence and that the program “creamed” (i.e., took the best qualified members of the
eligible population).
PEP was designed to focus resources on those thought to be most in need. The law called for
targeting assistance to such groups as veterans, younger and older workers, the economically
disadvantaged, welfare recipients, migrant workers, non-English speakers and workers laid off
due to cutbacks in the defense, aerospace, and construction industries. To ensure that many

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different occupational groups benefitted from PEP, the legislation mandated that a maximum
salary of $12,000 per employee could come from federal funds and (excluding teaching positions)
a maximum of one-third of the jobs created could be for professionals.
The Emergency Jobs and Unemployment Assistance At of 1974 (P.L. 93-567) amended the
Comprehensive Employment and Training Act (CETA) to add Title VI. The Emergency Jobs
Program was established to mitigate cyclical unemployment by funding temporary positions in
federal, state and local governments, and in nonprofits that provide public services. Title VI funds
(about $15 billion over the 1975-1982 period) were allocated to prime sponsors based on
measures of the relative severity of unemployment.
The program created many jobs quickly. But, CETA’s public service program was criticized for
creating “make work, dead end” jobs that neither provided society with worthwhile output nor
CETA workers with skills. (As previously mentioned, the public works approach is believed to
create worthwhile outputs but it might not permit much skill acquisition because the time spent
on projects can be quite short.)
Initially, to be eligible for subsidized jobs under Title VI, individuals had to have been
unemployed for 30 days, or 15 days in areas where the unemployment rate exceeded 7%. In both
the 1976 and 1978 amendments to CETA, the Title VI eligibility criteria were tightened to target
funds to low-income unemployed persons (e.g., the maximum annual federal subsidy per program
participant was lowered to $10,000). These changes were enacted to discourage what was
perceived as a widespread practice by state and local governments that reduced the net number of
jobs created: laying off current employees and then rehiring them using Title VI rather than state
and local funds to pay them.

In addition to authorizing countercyclical public works job creation, P.L. 94-369 at Title II
established the Anti-Recession Fiscal Assistance (ARFA) program. It operated from 1976 to late
1978. ARFA funds were released only if the national jobless rate exceed 6%, and the allocation to
individual governments was determined by local unemployment rates over 4.5% and by their
General Revenue Sharing allocations. By law, recipients of ARFA funds were required to spend,
appropriate, or obligate funds within six months of their receipt. The use of ARFA funds was
largely unrestricted (i.e., for the maintenance of basic services customarily provided by
government). The funds generally could be used for employment and acquisition of “normal”
supplies or materials, but not for construction or renovation.
A GAO report concluded that the program did not accomplish its objectives of preventing
employee layoffs, tax increases, and service cutbacks. It also stated that the unemployment rate is
not necessarily a good indicator of a recession’s impact on a jurisdiction’s financial condition.
Additionally, GAO criticized the allocation of just one-third of funds to state governments

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because recessions reportedly cause less budgetary disruption to local than state governments as
state revenue sources and expenditures are more sensitive to economic conditions.

The United States has had one experience with a tax credit intended to promote private sector job
growth as an antidote to cyclical unemployment. The New Jobs Tax Credit (NJTC) was enacted
in 1977 (P.L. 95-30, Title II). It ended in late 1978. The revenue loss to the government associated
with the credit (less the required reduction by firms’ deduction for wages and including
carryovers for several years) was estimated by the Treasury Department to be $5.7 billion.
The NJTC was a general subsidy meant to increase employment among all workers as opposed to
specific groups. It gave employers a credit against corporate or personal income tax liabilities for
job growth above a specified threshold that occurred in 1977 and 1978. Thus, NJTC was an
incremental (marginal) subsidy: credits were issued to businesses only if their employment rose
by a given amount above a certain base; in this case, the credit was equal to one-half of the
increase above 2% in an employer’s Federal Unemployment Tax Act wage base between the base
and current year. As a marginal credit, it tended to favor growing labor-intensive firms and to help
reduce “windfall gains” (i.e., paying employers for hiring they would have undertaken in the
absence of the program). Over time, however, it becomes increasingly difficult for employers to
qualify for a marginal credit.
The NJTC was capped in three different ways. No firm could claim a credit in excess of $100,000
annually, 25% of its unemployment insurance (UI) wages in the current year, or one-half of the
difference in the firm’s total wages for the year above 5% of the previous year’s total wages. The
reason for limiting the credit by relating it to the increase in total wages was to prevent employers
from claiming credits by artificially increasing their UI wages (e.g., making a full-time job into
part-time jobs or substituting lower paid for higher paid workers). The reason for capping the
credit at a percentage of a firm’s UI wages was to try to limit the amount that new expanding
firms could claim.
The NJTC was faulted for its complexity among other things. Because the credit was
nonrefundable, nonprofit groups could not benefit from it. Firms could carry back the credit
against past income taxes and carry it forward against future taxes if the NJTC exceeded the
firm’s current income tax liability. They had to reduce their wage deduction by the amount of the
NJTC when computing taxable income. One survey found that relatively few employers knew
about the credit, and of the firms that were aware of it, relatively few made a special effort to
increase employment because of the NJTC or thought they were eligible to claim it. Alternatively,
other analysts credited the NJTC with high employer use as shown by the amount claimed on tax
returns.

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