Jobs, Pay and Policy

In this third year of the Great Recession, jobs -- how to get them, how to keep them, how much they pay -- are the key issue, in the Midwest and across the nation. Two recent newspaper articles focused on this issue and, in the process, revealed what's being done, what's being done wrong, and the price we all will pay in the future.

The Chicago Tribune turned its Sunday business section over to a study of the job retention program adopted by the state of Illinois, focusing on Gov. Pat Quinn's policy of giving hundreds of millions of dollars in tax credits to companies to get them to stay in Illinois (see articles here, here, and here). A day later, the New York Times singled out Michigan as an example of the states and cities that are firing government workers in veterans' hospitals, prisons and other state-run facilities and replacing them with contract workers making as little as half as much.

We've written here on both issues in the past, so this is an update on two of the hottest topics on the Midwestern economic agenda.

The Tribune stories reported that Quinn, in his two years in office, has offered nearly a half billion dollars in tax credits to companies that promised to create 5,709 jobs and retain 22,610 jobs. A Tribune chart showed the state has pledged another $433 million over the past decade to 177 companies that promised to create some 30,000 jobs and retain roughly 20,000 more. The tax credits ranged from $34.7 million to JPMorgan Chase to five-figure packages for smaller companies at the bottom.

All this is under a program called Economic Development for a Growing Economy, or EDGE. In each case, the companies promised to make investments in Illinois well in excess of the tax break: JPMorgan Chase, for instance, promised investments of $350 million, ten times its tax breaks, and pledged to create 298 jobs and keep 2,247 more.

The program is wildly inconsistent. Jet Sert Co., a Chicago maker of puddings and freezer bars, got credits that equaled $375 per job a year. James Hardie Buildings Products Inc., pledged to create 22 jobs for tax breaks equal to $10,210 per job. Boeing got tax breaks of $12 million, equal to $22,857 for each of the 525 jobs it promised to create.

Not all the tax breaks have been cashed in. Companies have to deliver on their job-creation pledges, and many don't hit the goal.

But promises to create or retain upwards of 50,000 jobs would get any governor's attention. In these tough times, no politician can afford to ignore a company that brings jobs to his state, or threatens to move jobs out.

But the issue raises two questions: Is this the best way to do it? And is it paying off?

Critics point out that many of the promised new jobs are never created and that many of the retained jobs would have been retained anyway. Illinois companies have come to realize that all they have to do is threaten to move some jobs out of state to win visits from government officials bearing gifts.

If 50,000 jobs is a lot of jobs, then $433 million is a lot of money. Could this have been better spent on venture capital to help new companies get off the ground, or to bolster start-ups, or to help small companies that want to expand, instead of lavishing the money on the likes of Morgan and Boeing? It's these small companies that are more likely to create jobs and keep them close to home, not the big global companies that account for most off-shoring.

The critics also point out that that $433 million could have paid for a great deal of infrastructure improvement and other public works, including education, that improve a state's business climate. In the long run, such spending would do than tax breaks to create jobs.

But no governor looks to the long run. Building new businesses from the ground up takes time and generates no immediate headlines. No governor ever got re-elected for laying the groundwork of a thriving economy 20 years hence.

But is this paying off? The Tribune series noted that Illinois spends $100 million per year through a tax reform aimed at creating manufacturing jobs. When the reform came in, its backers projected it would create 285,000 new manufacturing jobs. Instead, manufacturing in the state has shrunk from 800,000 jobs when the reform began to 600,000 now.

The backers say that, without the tax breaks, the erosion would have been worse. But it makes little sense to spend hundreds of millions of dollars to prop up a sector that is doomed to shrink.

The Tribune also noted that the majority of EDGE projects have gone to counties that saw an increase of 4 percent or more in unemployment between 2001 and 2011. OK, there's a recession on, and unemployment has been rising everywhere. The increase might have been worse without the EDGE payments. but clearly, these payments haven't solved any problems.

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The Times reported on a woman in Grand Rapids, Michigan, who signed up with a private company that supplies employees to a local veterans home under a state contract. The woman, Ginny Townsend, makes $10 per hour, about half the pay of the full-time public employees at the home. Now, it said, the state wants to fire 170 nursing assistants at the home and replace them with cheaper contract employees like Ms. Townsend.

As the Times said, this is becoming an increasingly popular ploy for governments facing budget squeezes. Prisons, parks, school cafeterias and sanitation departments are being outsourced to private collectors. Republican governors in states like Michigan have taken most of the heat on this, but the Times noted that Rahm Emanuel, Chicago's new Democratic mayor, has just outsourced recycling collection in parts of his city.

The Center on Budget and Policy Priorities just reported that, since the Recession began, state and local governments have cut 644,000 public-sector jobs, including 242,000 job cuts by school districts.

For governments, this sounds good, just like using tax breaks to create jobs sounds good. But again, does it really work?

The Times didn't say how much Michigan is paying J2S Healthforce Group, the contractor that employs Ms. Townsend. But such contractors don't work for free, and one can assume that much of the $10 per hour that the state saved by hiring Ms. Townsend has gone to her boss. 

There's another problem -- the impact of this process on the economy. Ms. Townsend, at $400 per week, needs food stamps and other government help just to support her family. So, presumably, will the public employee she replaced, who now is unemployed.

All this is part of the decline of the American workforce and the growing gap between rich and poor. As we pointed out in an earlier post, the average public-sector worker in America makes $917 per week, exactly $200 more than than the $717 earned by private-sector workers. This disparity stirs considerable envy among private-sector workers against the public-service employees, many of whom are unionized.

But the solution is not to bring down the pay of the public-sector employees but to bring up the pay of workers in the private sector. As public sector workers lose protection, their pay inevitably will fall. This means that they, like those in the private sector, will have less to spend on groceries, clothes, cars and other consumer items -- the sort of spending that powers 70 percent of the American economy.

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Economists agree that the recession won't really end until consumers start consuming again. Cutting the wages of employees who are still earning a decent wage seems a bad way to make this happen.

Comments

[Aaron M. Renn]

The real problem is not the base pay disparity between the public and private sectors. It's that the public sector has been largely insulated from the upheavals that have radically changed the reality of work for most people in America. They are basically immune from being fired (in a recent analysis of some federal agencies, you were more likely to die than be fired), you have guaranteed defined benefit pensions, etc. Plus of course many extra holidays than private sector workers, often limited pressures to work overtime, etc.

Not only is the public rightly looking askance at that, these are bad practices generally. The pensions and such only make sense if you spend an entire career in government. I don't think we want a government populated by nothing but careerists. Without portable pensions, it's harder to bring in high quality talent from the private sector who may be interested in public service, but not for a lifetime. Also, people who may be miserable in their government job can't leave because of the pension shackles. Obviously the model needs to change bigtime.