public investments and job creation: from employment-impact assessments to employer of last resort

Public Investments and Job Creation: from employment-impact

assessments to employer of last resort

A presentation at the Global Development and Environment Institute

of Tufts UniversityJuly 24, 2014

by Steven [email protected]

Linking development project experience with economic policy

This presentation attempts to link project level experiences on job creation with a larger vision of economic and employment policy.

Likewise we believe that work in developing countries is relevant to the experiences of more industrialized countries, including those in the US.

Moving beyond the conventional wisdom on job creation

Typically job creation is seen from a small number of broad perspectives:Promote economic growth which it is assumed will in turn lead to job creation;Facilitate the role of the private sector which is the primary engine of job creation;Education and training programmes: To better prepare job seekers for the labour market.

In this presentation, I shall to examine an enhanced role which the public sector can and should play in job creation, mainly through public investment programmes and policies.

Employment Impact Assessments and “Employer of Last Resort” programmes

The focus will be not only on promoting economic growth as a means to stimulate job creation, but also looking at how to increase the impact of growth on job creation, in other words, increase the employment impact of economic growth. A major tool for doing so will be ongoing work of the ILO in the field of employment impact assessments.

Looking at the inverse relationship between jobs and growth, the presentation will also discuss some experiences in direct job creation: the concept and experiences employment guarantee or “employer of last resort” programmes, including the work of a group of economists, governments, institutions and advocacy groups in this field.

Expected Impacts from Job Creation Programs

Employment

Assets

Skills and work experience

3 to 5 times more direct employment creation 1.6 to 2.0 times more indirect employment creation

through multiplier effects (upstream and downstream linkages)

50% savings in foreign exchange Financial costs typically 20% less Impact of infrastructure on output, productivity and

employment

Infrastructure and Employment: What is the potential impact in

developing countries?

Advantages and Limitations to supply-side approaches

Advantages Focus is on reorientation of existing investment

allocations: requires no new resources Usually can be implemented by existing

institutional structures Disadvantages

Usually reaches only a small proportion of the unemployed

Comparing Supply- and Demand Driven Programs

Supply-driven programs Use existing investment resources and infrastructure

requirements as the starting point Works to increase the employment impact of these

resources Tries to mainstream labor-based approaches into

current investment programs and institutional set-ups to ensure sustainability

Focus on cost-effective and high-quality asset creation with employment as a secondary objective

Comparing Supply- and Demand Driven Programs

Demand-driven programs Takes current levels of un- and under-employment as

the starting point With job creation as the primary objective, explores

how to create useful and productive job opportunities to meet the existing demand for employment

Often relies on special project management units Issue of sustainability of “special” job creation

programs

Evaluating the employment impact of infrastructure investments

Comparative project-level studies comparing labour-based with equipment-based methodologies

Public investment budget analysis Simulations of employment impact of

infrastructure investments on the macro-economy

Comparison of Equipment based and labor based road construction: financial and economic costing

Table1

Source: Technology Choice: Man or Machine, including case studies from Lesotho and Zimbabwe, Lennartsson, M. and Stiedl, D., ILO, 1995.

Labour-based

Lesotho Equipment-based, Lesotho

Labour-based Zimbabwe

Equipment-based Zimbabwe

Financial Cost/Km US$

50,950 80,990 18,360 19,640

Labour Component*

44% 06% 43% 13.%

Reduction factor for labour component costs

2.6/5 2.6/5 9.7/24 9.7/24

Economic Cost/Km

40,190 78,660 14,000 18,120

Simulation of the macro-economic impacts of a 30 billion FCFA investment in rural road rehabilitation in Cameroon*

« Evaluating the impact of labour-intensive investments: the case of Cameroon, » Samuel Yemene, ILO, 2007

30 billion FCFA* is equivalent to the amount earmarked annually for rural road rehabilitation in the public investment budget and HIPC funds

Use of fixed-price input output model

*70,6 million USD

Table 2: Economic and Employment impacts of a 71 million USD rural road rehabilitation programme in Cameroon

(source: Evaluating the impact of labour-intensive investments: the case of Cameroon, Samuel Yemene, ILO, 2007)

In billions of FCFAEquipment based Labour intensive

TotalDirectEffet

IndirectEffet

TotalDirectEffect

IndirectEffect

GNP 25,62 2,13 23,49 50,91 12,00 38,91

Householdconsumption 32,74 1,64 31,10 46,36 9,24 37,11

Gross householdIncome 38,42 2,13 36,29 56,09 12,00 44,09

Private Investment 7,49 4,10 3,38 8,37 2,70 5,67

Public deficit -11,33 -27,64 16,31 -10,21 -28,04 17,83

InvestmentExpenditure 30,00 30,00 0,00 30,00 30,00 0,00

Revenue 18,67 2,36 16,31 19,79 1,96 17,83

Taxes/consumption 3,83 1,46 2,36 4,32 0,95 3,38

Taxes/foreign trade 1,92 0,81 1,11 1,82 0,52 1,30

Taxes/income 12,92 0,09 12,83 13,65 0,49 13,15

Balance of payments -16,74 -7,04 -9,70 -15,82 -4,50 -11,32

Imports 16,74 7,04 9,70 15,82 4,50 11,32

Employment creation(full time equivalents) 38 599 2 175 36 424 62 184 18 116 44 069

Multiplier 0.85 1,7

The American Recovery and Reinvestment Act

Labor Market Outcomes of Infrastructure Expenditures under the American Recovery and Reinvestment Act

Ajit Zacharias, Thomas Masterson and Kijong Kim

Levy Economics Institute of Bard College

January 13, 2009

A Report for the International Labor Organization

ARRA

Infrastructure expenditures constitute only a small portion of the total potential fiscal stimulus from the ARRA. Grants by the federal government to state and local governments for infrastructure investments are estimated to be $44 billion, or 5.6 percent of the projected total budgetary cost of the ARRA over the period 2009-2019 (CBO, 2009).

Note: A broader definition of “infrastructure” would suggest total expenditures worth nearly $90 billion, or about 11.4 percent of the total ARRA stimulus.

ARRA

Tax cuts, transfers to individuals, and transfers to state and local governments to support public education and medical assistance for the poor (Medicaid) account for 82 percent of the ARRA. Thus, it is reasonable to assume that the effects of the ARRA on aggregate output and employment will be influenced, at least in the immediate future, only to a limited extent by the infrastructure investments made possible by the legislation. The ARRA is mainly a tax-transfer program and not a public works program.

ARRA

Our estimate of the size of infrastructure expenditures is based on the information collected by the federal government from those who received ARRA funds in the form of contracts, loans and grants. The information pertains to funds awarded and expenditures incurred between February 17, 2009 and September 30, 2009. We combine the data about the recipients of grants and loans to form a database of 117,282 records where each record represents an award of funds made under the ARRA in the form of grants (116,675 records) or loans (607 records). The recipients reported the amount of infrastructure expenditures incurred in the reference period. The total amount awarded in contracts, loans and grants make up about 27 percent of the total fiscal stimulus from the ARRA during the period. The amount actually spent on infrastructure is $4.4 billion (2.6 percent of the total ARRA fiscal stimulus).

Table 3: Infrastructure Expenditures for the first two quarters of

ARRA spending and resulting job creation impacts

(based on ARRA recipient reports covering the period February-September 2009)(Source: Zacharias, Masterson and Kim, “Labor Market Outcomes of Infrastructure Expenditures under the

American Recovery and Reinvestment Act,” Levy Economics Institute of Bard College, 2009.

Industry

code Industry name

Expend-

itures

(millions

USD)

Share of

total (%)

Jobs Created

Direct Indirect Total

14 Water, sewage and other systems 54 1.2 39 618 657

15 Construction 2,992 67.4

20,706

12,568

33,274

106

Transit and ground passenger

transportation 1,055 23.7

11,557

10,816

22,373

109 Support activities for transportation 50 1.1 445 289 734

123 Real estate 168 3.8 372 599 971

All others 123 2.8 826 461 1,287

Total 4,442 100.0

33,945

25,351

59,296

Table 4: Employment multipliers for industries benefiting the most from

infrastructure expenditures(Source: Zacharias, Masterson and Kim, “Labor Market Outcomes of Infrastructure Expenditures under the American

Recovery and Reinvestment Act,” Levy Economics Institute of Bard College, 2009.

Industry code Industry name Direct Indirect Total

14 Water, sewage and other systems 0.72 11.43 12.15

15 Construction 6.92 4.20 11.12

106 Transit and ground passenger transportation 10.96 10.25 21.21

109 Support activities for transportation 8.88 5.76 14.64

123 Real estate 2.09 3.36 5.45

All industries 6.36 4.47 10.83

Table 5: Distribution of additional employment due to infrastructure expenditures among industries

(based on ARRA recipient reports covering the period February-September 2009,Source: Zacharias, Masterson and Kim, “Labor Market Outcomes of Infrastructure Expenditures under the American

Recovery and Reinvestment Act,” Levy Economics Institute of Bard College, 2009.

Industry/Sector Number Percent

Construction 20,816 35.1

Manufacturing 3,674 6.2

Wholesale and retail trade 3,887 6.6

Transportation and Warehousing 13,236 22.3

Transit and Ground passenger transportation 11,581 19.5

Other Transportation and Warehousing 1,655 2.8

Finance and Insurance 716 1.2

Real Estate and Rental And Leasing 763 1.3

Professional, Scientific, & Technical Services 2,852 4.8

Management, Administrative and Support, and Waste Management Services 2,660 4.5

State and local government 7,942 13.4

Local government passenger transit 6,431 10.8

Other state and local government 1,510 2.5

All others 2,750 4.6

TOTAL 59,296 100.0

Table 6: Selected demographic characteristics of those employed due to infrastructure expenditures (percent)

(based on ARRA recipient reports covering the period February-September 2009;Source: Zacharias, Masterson and Kim, “Labor Market Outcomes of Infrastructure Expenditures under the American

Recovery and Reinvestment Act,” Levy Economics Institute of Bard College, 2009.)

Category 2008

Job losses, December

2007 to November 2009 ARRA infrastructure

A. Sex

Male 52.0 67.7 79.5

Female 48.0 32.3 20.5

B. Race/Ethnicity

White 70.2 70.4 70.3

Nonwhite 29.8 29.6 29.7

C. Education

No College Degree 65.9 102.9 82.9

College Graduate 34.0 -2.9 17.1

D. Age

Prime working age (25 to 60) 77.4 52.9 82.6

Other ages 22.6 47.1 17.4

IMPACT OF INFRASTRUCTUREINVESTMENTS ON

EMPLOYMENT ANDECONOMIC ACTIVITY IN THE

U.S. ECONOMY

BY J O S H B I V E N SEconomic Policy Institute

(2014)

IMPACT OF INFRASTRUCTUREINVESTMENTS ON EMPLOYMENT AND

ECONOMIC ACTIVITY IN THE U.S. ECONOMY

Scenario one cancels scheduled cuts stemming from the budget “sequester” automatic, across the board cuts to discretionary spending called for in the Budget Control Act (BCA) of 2011). Under scenario one, a debt-financed $18 billion annual investment in infrastructure yields a $29 billion increase in GDP and 216,000 net new jobs by the end of the first year, with the increased levels then sustained over the next decade.Note: As of January 2014, a third of the scheduled sequester cuts were

cancelled for the next two years only.

Table 7: Employment and GDP impacts of U.S. infrastructure investment under various financing options: Scenario One

Debt Revenue, Revenue, Transfer Regulatory

progressive regressive Cuts mandates

Total Amount of Spending (billions USD) 18 18 18 18 18

Gross GDP Increase from Spending (billions USD) 29 29 29 29 29

Gross Employment Increase from Spending 216,000 216,000 216,000 216,000 216,000

Gross GDP Decrease from Financing (billions USD) 0.0 6.3 16.2 28.8 3.6

Gross Employment Decrease from Financing 0 47,250 121,500 216,000 27,000

Net GDP Increase from Package (billions USD) 28.8 22.5 12.6 0.0 25.2

Net Employment Increase from Package 216,000 168,750 94,500 0 189,000

Note: Multipliers are based on evidence reviewed in Bivens (2011) and Bivens (2012). Specifically, the multiplier for infrastructure investments is 1.6, the multiplier for progressive tax increases is (-) 0.9, the multiplier for regressive tax increases is (-) 0.35, the multiplier for transfers is 1.6, and following Bivens (2012), 20 percent of the stimulative effect of investments driven by regulatory mandates are crowded out. For employment impacts, we assume each percentage point addition to GDP adds 1.2 million jobs to the economy. The total spending figures are based on the infrastructure investment scenarios described in the text.

Source: Author’s analysis of Bivens (2012) Congressional Budget Office (2013), Council of Economic Advisors and Moody’s Analytics Bureau of Economic Analysis National Income and Product Accounts



Under scenario two, a debt-financed package of green investments totaling $92 billion annually boosts GDP by $147 billion and generates 1.1 million net new jobs by the end of the first year, with the increased levels then sustained over the next decade.



Scenario two implements a package of green investments that includes a large increase in investments in the energy efficiency of residential and commercial buildings and upfront investments to construct a national “smart grid,” yielding $92 billion annually in infrastructure investments over the next decade.

Table 8: Employment and GDP impacts of U.S. infrastructure investment under various financing options: Scenario Two





Gross Employment Increase from Spending 1,104,000 1,104,000 1,104,000 1,104,000 1,104,000

Gross GDP Decrease from Financing (billions USD) 0 32 83 147 18

Gross Employment Decrease from Financing 0 241,500 621,000 1,104,000 138,000

Net GDP Increase from Package (billions USD) 147,000 115,000 64 0 129

Net Employment Increase from Package 1,104,000 862,500 483,000 0 966,000

Note: Multipliers are based on evidence reviewed in Bivens (2011) and Bivens (2012c). Specifically, the multiplier for infrastructure investment is 1.6, the multiplier for regressive tax increases is (-) 0.9, the multiplier for progressive tax increases is (-) 0.35, the multiplier for transfers is 1.6, and following Bivens (2012c), 20 percent of the stimulative effect of investments driven by regulatory mandates are crowded out. For employment impacts, we assume each percentage-point addition to GDP adds 1.2 million jobs to the economy. The total spending figures are based on the infrastructure investment scenarios and are annual gains taking place over the next decade as described in the text.

Source: Author’s analysis of Congressional Budget Office (2012); Electric Power Research Institute (2011); and Pollin, Heintz, and Garrett-Peltier (2009).



Scenario three makes an ambitious investment in largely traditional infrastructure projects in transportation and utilities (particularly water treatment, distribution, and sewage systems) to nearly close the U.S. “infrastructure deficit” identified by the American Society of Civil Engineers (ASCE) and yield $250 billion annually in infrastructure investment between now and 2020.



Under scenario three, a debt-financed $250 billion annual investment boosts GDP by $400 billion and overall employment by 3 million net new jobs by the end of the first year, with the increased levels then sustained over the seven-year life of the investment.

Table 9: Employment and GDP impacts of U.S. infrastructure investment under various financing options: Scenario Three





Gross Employment Increase from Spending 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000

Gross GDP Decrease from Financing (billions USD) 0 88 225 400 50

Gross Employment Decrease from Financing 0 656,250 1,687,500 3,000,000 375,000

Net GDP Increase from Package (billions USD) 400,000 313,000 175,000 0 350

Net Employment Increase from Package 3,000,000 2,343,750 1,312,500 0 2,625,000

Note: Multipliers are based on evidence reviewed in Bivens (2011) and Bivens (2012c). Specifically, the multiplier for infrastructure investments is 1.6, the multiplier for regressive tax increases is (-) 0.9, the multiplier for progressive tax increases is (-) 0.35, the multiplier for transfers is 1.6, and following Bivens (2012c), 20 percent of the stimulative effect of investments driven by regulatory mandates are crowded out. For employment impacts, we assume each percentage-point addition to GDP adds 1.2 million jobs to the economy. The total spending figures are based on the infrastructure investment scenarios and are annual gains taking place between 2014 and 2020 as described in the text.

Source: Author’s analysis of Bureau of Labor Statistics Employment Requirements Matrix industry codes receiving spending flows to finance across-the-board increase in traditional infrastructure to close infrastructure deficit identified by ASCE (2013) .



Under all scenarios, jobs created are disproportionately male, Latino, and skewed away from younger workers.

Part II:Demand-driven public

employment programs:Employment guarantee programs

and the concept of employer of last resort.

33

Economic Advantages of an ELR

Improves and maintain levels of aggregate demand

Improves income distribution Struggles against poverty and exclusion Fixes a minimum wage for the formal and the

informal sector It is counter cyclical

Concept of Employer of Last Resort

Offers a job to anyone of legal working age who is willing and able to work

Will make a commitment to work in useful social and productive activities

Free entrance and exit to the program Provides a uniform compensation package at a

fixed minimum wage Takes workers « as they are » Links training with all activities

Objections to ELR

Affordability: Governments can’t afford to make an open-ended commitment

Will threaten macro-economic stability: inflation and currency depreciation

Unmanageable: leads to corrpution, not enough useful work, incorrigible workers

ELR as a Buffer Stock

Government hires labor “off the bottom” at the ELR wage and “sells” it at any higher wage

A wage floor cannot lead to pressure on wages The buffer stock effectively enforces a minimum

wage and avoids the race to the bottom which is represented by the informal economy

Hence ELR stabilized wages, production costs, incomes, consumption, prices and currency

The Jefes de Hogar program of Argentina

Was implemented after the 2001-02 crisis Massive devaluation and 25% of unemployment rate. Poverty above 50% of the total population Aimed to provide a job to unemployed people willing

to devote 20 hours per week Centralized administration of the program Projects at local level Participation of civil society

Plan Jefes de HogarDesempleados

•2.4 million beneficiaries at the peak in 2004•Total Cost:

• 0.92% of GDP• 4.9% of Federal Budget

•Coverage:• 16% of the all households nationwide

• In some provinces, 40% of households

• Very young population: 47% below 35 years old

• 71% female of which 60% female headed households (single parent)

82% are engaged in work

Microenterprise8%

Local Adminst.20%

School attendance

6%

Training4%

Other2%

Community Project

60%

Typical activities

•Production:• Bakery, Clothing, Bricks, Community farms• Construction and self construction• At individual level or cooperatives

•Production of services• Childcare, Elderly car• Teaching assistance• Community and school kitchens• Health programs support

•Education and vocational training

National Rural Employment Guarantee Act in India

30.72 million households in 330 districts were provided work compared to the demand received from 30.88 million households (99.5% which is a great achievement) Average of 93,090 households per district

On average, 39.21 person-days of work were provided per household versus the promised "guarantee" of 100 days of work for each household (i.e. 39.2 %) caused by lack of awareness, inadequate capacity to deliver, and the fact that the program is only two years old. However in total 2.1 million households have

completed 100 days of work

National Rural Employment Guarantee Act in India

The number of days of employment provided is not limited by the ability to finance the program, but rather defined as a right by legislation

The present expenditure figure represents about 0.4% of GDP

As the program is scaled up to meet its targets, these expenditures would not go beyond 1% of GDP, largely affordable for the Indian economy

Approximately US$ 8.52 million (393.58 million rupees) total costs was spent per district

Between 60 and 70% is spent on labor costs

Economists for Full Employment

For further information on public and “employer of last resort”programmes, see:

The Economists for Full Employment Network at:

http://www.economistsforfullemployment.org/

Thank you!

Steven Miller

[email protected]

public investments and job creation: from employment-impact assessments to employer of last resort

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