Monday, February 8, 2010

Governments - Incentivise employment

Every government in the world says one of its biggest priorities is to create jobs. And yet, very often, they do precisely the opposite. Governments, and policy makers, do not normally get it as to how to create jobs. A shining exception is China – no government in the world comes even remotely close to China when it comes to job creation.

How should governments stimulate job creation. By helping in all of the areas covered in this series – by favouring the manufacturing industry, by not adding burdens on to labour cost, by not putting insurmountable barriers to labour flexibility, by creating the right skilled work force, by investing in infrastructure, etc etc. But governments can directly aid employment too. Here’s (again of doubtful practicality) some prescriptions.

Firstly reduce incentives based on investment and increase incentives based on employment. Remove capital subsidies, investment subsidies, and shift to employment subsidies. Base tax holidays on employment, not investment.

Secondly, enable free movement of labour to areas where manufacturing is concentrated (instead of trying to bring manufacturing to where development has not taken place). Provide cheap housing options in such manufacturing clusters. This has been the key to China’s success. Manufacturing was stimulated in the coastal provinces (especially Guangdong), Because that was the ideal location for plants. Labour moved in from all the interior provinces (especially the hugely populated Sichuan). Shenzhen, a non descript fishing village 20 years go, is now a mega city. And for heaven’s sake jail the clowns who propagate the sons of the soil theory.

Thirdly make state and local governments accountable for number of jobs that are created in their state. Give them quotas for employment generation. Today, the progressive states woo investment. They should woo employment. Again, this is taken from China’s strategy. China woos both, but there are specific job creation quotas for officials and they get promoted based on how well they achieve this.

Fourthly make the salary bill tax deductible by two times the salary, for all wages paid to workers of below X dollars. Thus there is a tax incentive to employ lower wage workers, which is where unemployment hits the most. Fund this out of the reduction in the dole (unemployment benefit, social security, or by whatever name its called) that such a move would surely result in.

Fifthly, the government, as the largest single consumer in any country can use its huge buying power very effectively. Other things being equal, favour suppliers who have contributed to job creation. Make % increase in number of people employed as a criteria in vendor selection.

Governments can do a lot directly to incentivise employment. They have to believe passionately in it. That they will do if they know that they can remain in power (win election in democratic states ; get the favour of the leader in communist ones). Both the electorate and the leader might want to consider moving this to the top in the criteria for deciding whom they wish to back.