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Public Investments and Job Creation: from employment-impact assessments to employer of last resort A presentation at the Global Development and Environment.

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Presentation on theme: "Public Investments and Job Creation: from employment-impact assessments to employer of last resort A presentation at the Global Development and Environment."— Presentation transcript:

1 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 University July 24, 2014 by Steven Miller

2 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.

3 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.

4 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.

5 Expected Impacts from Job Creation Programs Employment Assets Skills and work experience

6 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?

7 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

8 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

9 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

10 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

11 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.

12 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, 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

13 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)

14 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

15 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 (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.

16 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.

17 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, 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).

18 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, Industry codeIndustry name Expend- itures (millions USD) Share of total (%) Jobs Created DirectIndirectTotal 14Water, sewage and other systems Construction2, ,706 12,568 33, Transit and ground passenger transportation1, ,557 10,816 22, Support activities for transportation Real estate All others ,287 Total4, ,945 25,351 59,296

19 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, Industry codeIndustry nameDirectIndirectTotal 14Water, sewage and other systems Construction Transit and ground passenger transportation Support activities for transportation Real estate All industries

20 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, Industry/SectorNumberPercent Construction20, Manufacturing3, Wholesale and retail trade3, Transportation and Warehousing13, Transit and Ground passenger transportation11, Other Transportation and Warehousing1, Finance and Insurance Real Estate and Rental And Leasing Professional, Scientific, & Technical Services2, Management, Administrative and Support, and Waste Management Services2, State and local government7, Local government passenger transit6, Other state and local government1, All others2, TOTAL59,

21 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.) Category2008 Job losses, December 2007 to November 2009ARRA infrastructure A. Sex Male Female B. Race/Ethnicity White Nonwhite C. Education No College Degree College Graduate D. Age Prime working age (25 to 60) Other ages

22 IMPACT OF INFRASTRUCTURE INVESTMENTS ON EMPLOYMENT AND ECONOMIC ACTIVITY IN THE U.S. ECONOMY BY J O S H B I V E N S E CONOMIC P OLICY I NSTITUTE (2014)

23 IMPACT OF INFRASTRUCTURE INVESTMENTS 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.

24 Table 7: Employment and GDP impacts of U.S. infrastructure investment under various financing options: Scenario One DebtRevenue, TransferRegulatory progressiveregressiveCutsmandates Total Amount of Spending (billions USD)18 Gross GDP Increase from Spending (billions USD)29 Gross Employment Increase from Spending216,000 Gross GDP Decrease from Financing (billions USD) Gross Employment Decrease from Financing047,250121,500216,00027,000 Net GDP Increase from Package (billions USD) Net Employment Increase from Package216,000168,75094, ,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

25 IMPACT OF INFRASTRUCTURE INVESTMENTS ON EMPLOYMENT AND ECONOMIC ACTIVITY IN THE U.S. ECONOMY 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.

26 IMPACT OF INFRASTRUCTURE INVESTMENTS ON EMPLOYMENT AND ECONOMIC ACTIVITY IN THE U.S. ECONOMY 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.

27 Table 8: Employment and GDP impacts of U.S. infrastructure investment under various financing options: Scenario Two DebtRevenue, TransferRegulatory progressiveregressiveCutsmandates Total Amount of Spending (billions USD)92 Gross GDP Increase from Spending (billions USD)147 Gross Employment Increase from Spending1,104,000 Gross GDP Decrease from Financing (billions USD) Gross Employment Decrease from Financing0241,500621,0001,104,000138,000 Net GDP Increase from Package (billions USD)147,000115, Net Employment Increase from Package1,104,000862,500483, ,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).

28 IMPACT OF INFRASTRUCTURE INVESTMENTS ON EMPLOYMENT AND ECONOMIC ACTIVITY IN THE U.S. ECONOMY 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.

29 IMPACT OF INFRASTRUCTURE INVESTMENTS ON EMPLOYMENT AND ECONOMIC ACTIVITY IN THE U.S. ECONOMY 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.

30 Table 9: Employment and GDP impacts of U.S. infrastructure investment under various financing options: Scenario Three DebtRevenue, TransferRegulatory progressiveregressiveCutsmandates Total Amount of Spending (billions USD)250 Gross GDP Increase from Spending (billions USD)400 Gross Employment Increase from Spending3,000,000 Gross GDP Decrease from Financing (billions USD) Gross Employment Decrease from Financing0656,2501,687,5003,000,000375,000 Net GDP Increase from Package (billions USD)400,000313,000175, Net Employment Increase from Package3,000,0002,343,7501,312,50002,625,000 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).

31 IMPACT OF INFRASTRUCTURE INVESTMENTS ON EMPLOYMENT AND ECONOMIC ACTIVITY IN THE U.S. ECONOMY Under all scenarios, jobs created are disproportionately male, Latino, and skewed away from younger workers.

32 Part II: Demand-driven public employment programs: Employment guarantee programs and the concept of employer of last resort.

33 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

34 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

35 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

36 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

37 The Jefes de Hogar program of Argentina Was implemented after the 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

38 Plan Jefes de Hogar Desempleados 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)

39 82% are engaged in work

40 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

41 National Rural Employment Guarantee Act in India million households in 330 districts were provided work compared to the demand received from million households (99.5% which is a great achievement) Average of 93,090 households per district On average, person-days of work were provided per household versus the promised "guarantee" of 100 days of work for each household (i.e %) 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

42 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 ( million rupees) total costs was spent per district Between 60 and 70% is spent on labor costs

43 Economists for Full Employment For further information on public and “employer of last resort”programmes, see: The Economists for Full Employment Network at: Thank you! Steven Miller


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