What Works the Best? BY KIMBERLY AMADEO Updated March 19, 2019 The goal of all job creation strategies is to stimulate healthy economic growth. Economists agree that annual growth between 2 and 3 percent is sustainable. It will create the 150,000 jobs per month needed to employ new workers entering the labor force. In a free market economy, the government need not do anything when growth is healthy. Capitalism encourages small businesses to compete, thereby creating better ways to meet consumers' needs. Because of this, small businesses account for 65 percent of all new jobs created. The proper role of government is to provide a supportive environment for growth. Even a healthy economy is subject to the bubbles and busts of the business cycle. When the economy contracts into a recession, the government must create solutions to unemployment. It may use expansive monetary policy, expansive fiscal policy, or both to stimulate job growth. Here are the four job creation strategies that give the most bang for the buck. Reduce Interest Rates to implement a monetary policy. An effective tool for job creation would be an expansionary monetary policy which increases the volume of money circulating in the economy. More money going around means more consumerism, more demand, more business, and therefore more employment. A University of Massachusetts at Amherst study found that all government spending is not created equal. The most cost-effective ones are building roads, bridges, and other public works. One billion dollars spent on public works created 19,975 jobs. Public works create jobs because it puts people right to work. The federal government can quickly fund construction projects already in the approval pipeline. It can hire contractors, send money to the states, or hire workers directly. That was one reason why the American Recovery and Reinvestment Act ended the Great Recession in 2009. It spent $87 billion in shovel-ready construction projects. The second most cost-effective solution is unemployment benefits. Every $1 billion spent created 19,000 jobs. Unemployment benefits create so many jobs because the unemployed must spend all the benefits received. Retailers and manufacturers respond to the added demand by hiring more workers to keep up. The third most effective spending solution is education. For each $1 billion spent, it created 17,687 jobs. Tax cuts create jobs by letting families or businesses keep more of the money they earn. The idea is that consumers will buy more things, thereby stimulating demand. Businesses use tax cut money to hire much-needed workers. All tax cuts are not created equal when it comes to job creation though. A Congressional Budget Office study found that, for example, the Bush tax cuts created 4,600 jobs for every $1 billion in foregone tax revenue. Payroll tax cuts did better. They created 13,000 new jobs for every $1 billion spent. Companies use the tax savings in one of four ways. All of them increased the demand needed to drive job growth for the following four reasons: Reduce price, increase employee wages, buy more supplies, hire more workers directly. The best was a payroll tax cut given only for new hires. With it, every $1 billion created 18,000 new jobs. Payroll tax cuts are more effective than income tax cuts in creating jobs. A study by the Congressional Budget Office found that every $1 million in payroll tax cuts creates 13,000 new jobs. That's because it allows businesses to hire new workers without increasing their payroll budget. Even better are payroll tax cuts for new hires only, which creates 18 new jobs for every $1 million cuts. Income tax cuts aren't as effective, only creating 4.6 jobs for every $1 million cut. That's because many people save the extra money. It doesn't go into the economy, where it could According to theories by supply-side economics, trickle-down economics, and the Laffer Curve, tax cuts on businesses and the wealthy drive the economy towards growth. With less taxes and more wealth to dispose of, companies and those in the upper income bracket can spend much more and bring about activities that generate demand for new jobs. Therefore, so many people favor payroll tax cuts as the best form of tax cuts 4. Represent graphically how a monetary policy exerts its effect on aggregate demand Production function and labor market in an economy operating under its capacity. Interpret your graphs (2 Marks) Effect on the Aggregate Demand: Money Market Investment Function Market for goods and services Production function and labor Market Production Function Labor Market