State Policies That Support Employment

Governments utilize policies to impact the efficiency of labor markets. These policies are designed to increase employment by encouraging people to look for work, make it easier for people to get to work, provide support for people who are working, create opportunities for employment, and help people become qualified to work.

States with higher working-age employment rates also tend to have higher reported levels of well-being, as depicted below:

Wellbeing Index

A new report (PDF) conducted jointly by the Illinois Economic Policy Institute (ILEPI) and University of Illinois at Urbana-Champaign finds four public policies that directly support employment:

  1. Improving the share of the population with a bachelor’s degree increases a state’s human capital, productivity, and technological and innovative capacities. A one percentage-point increase in the share of the population with a bachelor’s degree is statistically associated with a 0.80 percentage-point increase in the employment rate.
  1. Increasing the number of three and four year olds in state early childhood education programs improves outcomes for children later in life and supports employment because parents, particularly mothers, re-enter the workforce instead of staying at home with their kids. A one percentage-point increase in the share of three and four year old children enrolled instate early childhood education programs also has a statistically significant impact, increasing the working-age employment rate by 0.07 percentage point.
  1. Improving and expanding roads, bridges, highways, subways, railroads, and waterways all provide direct jobs to construction workers over the short term and allows businesses to efficiently bring their product to market in the long run. As a result, a one percentage-point increase in the highway share of state expenditures is statistically associated with a 0.39 percentage-point increase in the working-age employment rate.
  1. Reducing the average travel time commuting to work increases worker-to-firm connectivity and improves economic output by providing individuals with more time to engage in productive activities rather than sitting idle in congested traffic. A 20-minute drop in mean travel time to work would increase the working-age employment rate by 0.09 percentage point.

HighwayEmployment

In addition, there is one government practice that indirectly supports employment:

  1. Higher budget surpluses in state government improve investor confidence in states and ensure that funds are available during recessions and other economic downturns. A one percentage-point increase in the state’s budget surplus over total revenue is associated with a 0.20 percentage-point increase in the working-age employment rate.

Seven variables have suggestive direct impacts on the working-age employment rate. More health insurance coverage for workers, more pension coverage for workers, and more child care workers may all positively affect the working-age employment rate, but there is not enough evidence to draw a confident conclusion. A higher minimum wage, a higher personal income tax rate, a higher amount of corporate subsidies, and a higher violent crime rate may all negatively affect the working-age employment rate, though again there is not enough evidence to draw a confident conclusion.

There are nine additional policies and factors examined that have no apparent direct impact on the working-age employment rate. Among these are “right-to-work” policies and the state-level unionization rate. Contrary to political rhetoric, a higher union density does not reduce employment and related policies to limit the power of labor unions have no discernible impact on the working-age employment rate. A higher number of unemployment insurance weeks also has no impact on the employment rate. Small or modest increases in state sales taxes and corporate income taxes all also have no direct statistical impact on the employment rate. However, tax revenues do enhance the capacity to produce spending on the five major areas that were found to strongly support employment.

IncomeTaxEmployment

Here’s our data-driven policy proposal: If the state’s flat personal income tax rate is retroactively increased from 3.75 percent to 4.75 percent, the state would generate $3.5 billion in additional tax revenue. We call for dedicating this new $3.5 billion only to five government expenditures.

  1. $375,000,000 is to be spent on grants for public higher education to reduce the cost of attending public universities.
  2. $375,000,000 is to be spent on the construction of new highway, road, and bridge infrastructure.
  3. $375,000,000 is to be spent on mass transit systems to reduce commute times to work, particularly in the Chicago metropolitan area.
  4. $375,000,000 is to be spent doubling the number of children enrolled in state early childhood education programs.
  5. $2,000,000,000 is to be used to reduce the deficit and meet the required income tax revenues needed to implement the budget offered by the nonpartisan, nonprofit Civic Federation (2015). Note that the Civic Federation’s proposal includes other revenue-increasing and cost-cutting measures that close the rest of the state budget. While not a labor market policy, decisions to raise the necessary revenue to balance or create state budget surpluses are strongly correlated with an increase in the employment rate.

These public policy changes would boost employment. The working-age employment rate would increase by up to 2.4 percentage points in Illinois, amounting to nearly 180,000 new jobs supported. The policy changes would also add at least $2 billion on net to the Illinois economy, even after accounting for higher income taxes paid. The benefits significantly outweigh the costs.

EmploymentResults

The public policies that “work” for workers are all investments using taxpayer dollars. Government investments in transportation infrastructure, in the education of residents of all ages, and in future public expenditures all support employment. Other policy changes, such as curtailing union membership or lowering the minimum wage, do not increase the employment rate in any way.

Perhaps unsurprisingly, when nearly 100 of Illinois’ top economics professors and policy professors were anonymously surveyed in August 2015 about policies that would improve the employment rate and grow the economy in Illinois, only four policies out of ten received majority support:

  1. Expanding enrollment in early childhood education programs (71%);
  2. Increasing investment in highways and bridges (69%);
  3. Increasing investment in public transit systems (67%); and
  4. Raising the share of the workforce with a bachelor’s degree or higher (64%).

ILAcademicsPoll_EmploymentSupports

The economic data — and the responses of Illinois’ academic experts who study the economy — are clear. The State of Illinois should take steps to increase investment in public education, increase investment in public infrastructure, and balance the state budget.


Frank Manzo IV is the Policy Director of the Illinois Economic Policy Institute (ILEPI). Visit ILEPI at www.illinoisepi.org or follow ILEPI on Twitter @illinoisEPI. The full report, Policies That Support Employment: Investments in Public Education, Investments in Public Infrastructure, and a Balanced State Budget, is available here. In addition, the results of The Views of Top Economics and Policy Professors in Illinois are available here.


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