Appendix THE CURRENT POLICY STRATEGY The direct response of the budget to unemployment reflects, for the most part, a system designed for relatively full employment. Education and training moneys are spent with the expectation that beneficiaries will find employment and be able to use the acquired skills. Unemployment insurance is primarily intended for those who are on temporary layoffs or temporarily between jobs. At relatively full employment most of the unemployed are new entrants or re-entrants to the labor force and the average duration of unemployment is less than 10 weeks. However, in a recession, job losers make up more of the unemployed and the duration lengthens. (See Table A-1.) Moreover, expenditures for unemployment compensation rise while the return on public and private investment in training and education falls. Table A-1.-CHANGES IN CHARACTERISTICS OF UNEMPLOYMENT [Dollars in billions] 1 Fiscal years 1966-70 and fiscal year 1976 estimated. 2 Annual average over 5-yr period. 3 Annual average for 1967-69. Data in this category not available prior to 1967. The depth of the 1974-75 recession led to a strengthening of the direct response to unemployment in income maintenance and to a lesser degree in direct employment programs. Unemployment compensation was expanded in coverage (via Supplementary Unemployment Assistance-SUA) and duration (via Federal Supplemental Benefits-FSB). Regular unemployment insurance benefits also expanded automatically. The number collecting benefits from State insurance programs doubled between September 1974 and April 1975. Although the Congress expanded direct employment programs with the passage of legislation funding 300,000 public employment positions, the biggest impact of unemployment on Federal expenditures was in income maintenance. There are few who expect a quick return to 1973 levels of unemployment. Current policies describe a continuation of the strategy of unchanged expenditures for increasing employability, relatively modest increases in expenditures for direct employment, and continued (55) primary reliance on income maintenance. (See Figure 4 and Tables 6 and 7 in the text.) The purpose of this appendix is to describe an alternative strategy that shifts funds away from income maintenance toward direct employment and possibly training programs. AN ALTERNATIVE STRATEGY The vehicle for describing an alternative strategy is a public employment program targeted on households with little other income. This targeting differs from the current strategy in which neither education, unemployment compensation, nor public jobs are distributed on the basis of need. If the program is properly designed, the funds provided for direct employment can, therefore, improve on unemployment insurance as a way of meeting income maintenance needs. Moreover, if training is a component of the program, public employment can also be used to increase the employability of the work force. Public employment cannot be evaluated in the abstract; a judgment can be made only about specific programs in a specific economic and political context. A program offering workers higher wages than they are likely to obtain in the private economy will clearly be more inflationary than one that does not. The state of the business cycle is also important. Only when there is relatively full employment will federally financed public employees be likely to displace other State and local workers or take workers from the private sector. Finally, if the budget deficit is the constraint on the amount of economic stimulus policymakers are willing to provide, then public employment can provide more jobs per dollar than any other feasible alternative. Given the high rates of unemployment projected for the next few years under even the most favorable assumptions and the political desire to limit the deficit, there is no conflict between public and private jobs over the next few years. The choice is not between good, private jobs, and not-so-good public jobs, but rather whether public jobs should be created in addition to the private jobs. With the number of unemployed expected to exceed 6 million in 1978 an expansion of public employment will increase, not decrease, private employment. Moreover, the stimulation to the private sector of the public salary (less unemployment insurance) is at least equal to that of a tax cut. PROGRAM DESCRIPTION Assume that the program will provide 750,000 positions, the number of positions and wage rates would be: 500,000 full-time jobs paying $7,500 annually for households containing children (Class A job). 150,000 half-time jobs paying $5,500 annually for single-parent households containing children (Class B job). 50,000 full-time jobs paying $6,000 annually for two-adult households (Class C job). 50,000 full-time jobs paying the minimum wage ($4,800 annually) for single-person households (Class D job). Eligibility for these jobs will be restricted to those who have been on unemployment for 15 weeks or whose family has been on welfare 15 weeks. Jobs will be distributed on the basis of local unemployment rates. Within the local area, a certain proportion of jobs will be targeted on those who have exhausted their unemployment compensation. Households whose income from sources, other than unemployment compensation or welfare, exceeds $5,000 annually ($1,250 in the previous quarter) will be ineligible. The annual income limit would be $2,500 for households without children. With these rules, only one person from each household would be eligible. Sponsors would be State and local governmental units or nonprofit units. These would receive $20.00 a week to cover administrative costs and fringe benefits for each enrollee in Class A jobs and proportionately less for those in the other categories. Fringe benefits and terms would be as follows: Enrollees must leave the program after 12 months for a period of at least 15 weeks during which time unemployment compensation and/or welfare would resume. Employees would be entitled to participate in the sponsor's health insurance plan but not the retirement plan. INCREASED COST OF THE DIRECT RESPONSE TO UNEMPLOYMENT The changes in the direct response budget would be as shown in Table A-2 if the following assumptions are correct: (1) That the average enrollee in the Type A, C, and D jobs would otherwise be receiving $65 a week in unemployment compensation and food stamps.1 (2) That enrollees in Type B programs would otherwise be receiving $150 per month from the Federal Government for welfare and food stamps. The change in the direct response budget is shown in Table A-2. 1 Seventy dollars was the average weekly Unemployment Insurance (U.I.) payment in the first 10 months of 1975. The benefit received by the average enrollee could, however, be either above or below this figure. Enrollees receiving U.I. payments are likely to be household heads receiving more than the average payment. As of January 1976, the maximum weekly benefit ranged from $60 to $139. On an employment weighted basis, the average maximum is $105. Among families with an unemployed household head and income under $5,000, 35 percent received food stamps. The average monthly bonus was $84 for families with an unemployed household head. The participation rate and average payment is likely to be higher for poor families where the household heads have been unemployed for an extended period. These overestimates of the net program cost is offset because some enrollees would not be receiving U.I. benefits if they are heading welfare families and/or have exhausted their benefits for part of the work period. The $65 average weekly payment is consistant with the following breakdown of enrollees: 35 percent receiving $95 weekly in combined unemployment compensation and food stamps; 40 percent receiving $75 in unemployment compensation; 10 percent receiving $20 in food stamps; and 15 percent receiving nothing at all. 72-678-76-5 Table A-2.-CHANGE IN THE BUDGET'S DIRECT RESPONSE TO UNEMPLOYMENT FROM A TARGETED PUBLIC 1 The indirect effect of the economic stimulus is estimated to 2 $1,000 for administrative costs and fringe benefits for class A 3 Using $65 per week average food stamps and unemployment 4 Using $150 per month for food stamps and the Federal share Type A job: Persons with 2 or more dependents, including at Type B job: Single parent household heads with school-age Type C job: Persons with 1 dependent, working fulltime. Type D job: Individuals with no dependents, working fulltime. 4 OFFSETTING INDIRECT EFFECTS The indirect effect of the additional Federal expenditures on the private economy will partially offset the net increase in the direct response budget. The increase in the deficit will be less than $3.5 billion because enrollees will spend their additional income increasing sales and production in the private sector. The $3.5 billion increase in the direct response budget is likely to have a "fiscal multipler" of 1.5, and thus increase private GNP by $5.2 billion. The additional consumer demand will increase private employment by 125,000, increasing Federal revenues by $1.5 billion and reducing unemployment related expenditures by $200 million. Under these assumptions, a program providing 750,000 targeted public employment positions will add $1.8 billion to the deficit $2,400 per public job or $2,100 per job if the private jobs created by the economic stimulus are also counted. The effect on State and local budgets will not be small either. The reduction in welfare will save these jurisdictions $0.2 billion. More importantly, the stimulus to the private economy will increase their revenues and further lower welfare costs by another $0.6 billion. In total, the savings will be $0.8 billion, or over a $1,000 per employee, if the foregoing assumptions are correct. The savings to State and local governments are overstated to the extent that sponsors are required to contribute more than $1,000 per job in administrative costs, fringe benefits, and training. The savings are understated, however, if there is any displacement of regular workers by these new enrollees or if the reduction in the non-welfare unemployment saves these jurisdictions some money. Of course, if there is displacement of regular workers then the net new jobs created by this program is also overstated. |