The Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency. Job Creation for Low-Wage Workers: An Assessment of Public Service Jobs, Tax Credits, and Empowerment Zones. Introduction


In the current budget and policy environment, it is more crucial than ever to make sure that low­wage workers are participating in the labor market to the fullest extent possible. Eligibility for some safety net programs, such as Temporary Assistance for Needy Families (TANF), is restricted to five years at most over a lifetime, and other programs such as General Assistance have been cut back severely. The TANF program also includes strict work requirements for participants and for states administering the programs.

There are a variety of approaches that can be used to increase employment by low­wage workers, and the appropriate strategy depends on labor market conditions, policy goals, budget constraints, and the situation of the individual. Broad policy options to increase employment include:

  • Occupational training and education. Classroom training can be used to provide low­skill workers with additional skills that will help them compete in the labor market. Appropriate training can increase the number of jobs to which a person has access, the wages they can receive, or both. Under some circumstances, the training can also be provided as on­the­job training by employers. Education is a more general form of training, and educational attainment is highly correlated with earnings.
  • Assessment, counseling, labor market information, and labor exchange services. The new Workforce Investment Act (WIA) refers to these as "core services," and authorizes their provision to the entire labor force. These services do not enhance the vocational skills of workers or create new jobs, but they should reduce the friction in the labor market, resulting in a better match between workers and jobs and less frictional unemployment.
  • Tax incentives for workers and employers. Incentives in the form of tax credits can be provided to workers to increase their interest in working and/or to employers to reduce the cost of labor (or other factors) to encourage hiring additional labor. Additionally, the tax incentives can be restricted to workers with particular characteristics (e.g., welfare recipients) and employers that meet specified criteria (e.g., locating in a designated empowerment zone).
  • Public employment programs. In these programs, the government provides jobs in the public sector or arranges for partially or fully subsidized jobs in the nonprofit sector for eligible persons. The jobs can either be human capital­oriented, where the objective is to increase the work skills of the person, or countercyclical, where the goal is to provide useful work when there are insufficient suitable jobs available in the economy.

The basic approaches listed above differ in terms of how they achieve additional employment for low­wage workers, and their suitability will depend on the cause of the lower­than­desired employment and society's goals. Occupational training and education will lead to increased employment if the trained workers move from a sector with an oversupply of labor to one that can absorb them.(1)  The second category of services, providing information to job seekers about themselves and the labor market, can increase employment by reducing search time for jobs. Tax incentives for workers, under certain conditions, can result in some individuals deciding to seek employment rather than remain on welfare or otherwise out of the labor force. Tax incentives for firms can reduce the price of all or certain types of labor, resulting in an increase in demand for labor. Public employment programs can directly lead to job creation if the newly created jobs do not displace or substitute for jobs that would have been filled without the program.

In this paper, the research findings dealing with public employment programs and several types of tax credits are reviewed, including the Earned Income Tax Credit (EITC), the Targeted Jobs Tax Credit (TJTC) and its recently renamed reincarnation the Work Opportunity Tax Credit (WOTC), and geographically targeted tax credits used in empowerment zones and related programs. Job creation, as used here, means creating new jobs, not simply placing people into existing positions. As structurally oriented employment­generating programs, we are interested in evidence on the extent to which the programs increase employment, any undesired effects (such as creating jobs in one area by taking them from adjoining areas), and what the costs are per job created for the target group of interest.(2)

The focus of the paper on job creation and tax credit policies does not necessarily imply there is no utility associated with training and programs intended to reduce labor market frictions. There is currently some debate in the policy community about whether training or labor force attachment programs are more effective for various target groups, but both strategies have been shown to have positive impacts on employment and earnings, at least in the short run.(3)  The next section of the paper summarizes the literature on public job programs. The following section discusses tax credits, and the final section presents conclusions. Because public job creation programs are the most likely approach to produce new jobs, more attention is devoted here to that approach. This does not imply that tax credits are not as important, simply that job creation is not generally their central function.