During the last recession, the Department of Labor was asked to evaluate four public policies to deal with the labor market consequences of the economic downturn.

Policy A- Cut the employer share of social security taxes by 0.5-percent. (Average)

Policy B- An employment tax credit of $12 per person day worked in excess of the previous year's employment. (Marginal)

Policy C-An increase in the taxable base for unemployment insurance contributions to offset the depletions included by the recession.

Policy D- A tax on group health insurance premiums to be used as a trust fund to continue group health coverage for employees on layoff.

Using simulation methods and measures of elasticity of labor demand estimates the analysts found the following impacts with the above-mentioned policies:

1 used policy A: For policy one, the employment effect was the growth of approximately 200,000 jobs for four quarters.

2 used policy B: For policy two, the employment effect was a growth of approximately 800,000 jobs for four quarters.

3 used policy C: For policy three, the employment effect was a decline of approximately 50,000 jobs for four quarters.

4 used policy D: For policy four, the employment effect was a decline of approximately 38,000 jobs for four quarters.

Questions

1. Using your knowledge of demand analysis explain why the estimates in policy one differ from policy two by such a large amount.

--Using my knowledge of demand analysis, the reason the estimates differ in policies 1 and 2 is that in policy 2 it is a direct subsidy to the marginal workers. Policy 1 rate of return is slower effects on the average of workers.

2. Explain why policies one and two differ in their outcomes from three and four.

--Policies 1 and 2 decrease labor and 3 and 4 increase labor

3. What are the political implications of using only four quarters rather than long-run estimates?