OSEC Congressional Testimony

Testimony of Robert B. Reich Secretary of Labor before the Subcommittee on Select Revenue Measures Committee on Ways and Means United States House of Representatives [09/29/94]

Good morning, Mr. Chairman and Members of the Subcommittee. I am pleased to have the opportunity to testify before you on the Targeted Jobs Tax Credit.

The Targeted Jobs Tax Credit (TJTC) was enacted in 1978 to improve the private sector employment prospects of disadvantaged individuals. The credit is scheduled to expire at the end of this calendar year.

As you know, the Administration has not sought an extension of TJTC in its present form. Earlier this year, I cited TJTC as a program that does not deliver on its goals, and indicated my opposition to its extension without reforms. We need to either fix the program or find another approach.

And let me emphasize that the options are to fix TJTC or find another approach--not abandoning the goal. Because although the current TJTC is flawed, its objective -- to improve the job prospects of the least advantaged -- is more important than ever.

Ironically--or more accurately, perhaps, tragically--we have seen a steady decline in the economic prospects of less-advantaged workers since the TJTC was enacted in 1978. The groups targeted by the TJTC, especially youth and welfare recipients, are precisely those who have suffered most from this decline. Over 11 percent of the American population received

welfare payments in 1993 -- a new record, up from less than 8 percent in 1978. Unemployment rates among young, out-of-school high school graduates have increased from 8.8 percent in 1978 to 13.3 percent in 1993--and the situation is even worse for dropouts.

For some groups of Americans, the jobs problem is now a jobs crisis. In 1993, one quarter of black males between the ages of 16 and 24 were idle -- neither in school nor working. The lack of good job opportunities for youth has helped to produce and sustain the high levels of criminal activity that plagues America's cities. The number of 18 to 24 year olds in prison today is nearly double what it was when the TJTC was enacted, despite the fact that the total population in this age group has declined since 1978.

The fundamental problem has as much or more to do with job quality as with job quantity. When disadvantaged workers find jobs, their wages are typically very low, and have been dropping. The median income (in constant dollars) of families led by people aged 24 or under has declined by over one-third since 1978, and in 1992 was only $15,700 annually. In 1992, some 76% of young workers 18 to 24 had annual earnings too low to support a family above poverty. Most economists believe that the low wages and low job quality available to disadvantaged youth are a major reason why so many have dropped out of the labor force completely, and why some turn to crime.

These data illustrate why we must not abandon the goal of the TJTC, even as we take a clear-eyed, critical look at how the current program performs. An employment tax credit can be an important part of an effective strategy to improve the job prospects of the disadvantaged. The current TJTC is not working, but the Administration is eager to work with Congress in designing a reformed TJTC that will accomplish this goal. We feel that there are a number of practical reforms available which can substantially increase the effectiveness of TJTC.

Let me briefly describe the program and the evidence we have regarding its current effectiveness. TJTC is a nonrefundable tax credit that is available to employers who hire the economically disadvantaged, including youth aged 18-22; cooperative education students 16-19 years old; ex-offenders; Vietnam-era veterans; individuals receiving general assistance, Supplemental Security Income, or Aid to Families with Dependent Children; or vocational rehabilitation referrals. Economically disadvantaged summer employees aged 16-17 are also included. The program allows for a tax credit of 40 percent of any portion of the first $6,000 earned by a certified worker within a year of the hire, provided the employee works at least 120 hours or 90 days.

Administration of the TJTC is a joint responsibility of the Treasury Department's Internal Revenue Service and the Federal-State Employment Service system. The IRS is responsible for administering the tax-related aspects of the program, while the State Employment Service Agencies, funded by the Department of Labor's Employment and Training Administration, are responsible for documenting worker eligibility, vouchering and issuing certifications to employers.

Including the two studies recently issued by the OIG, there have been some twelve studies of the results of the TJTC program completed over the past 15 years. Numerous other publications on the TJTC have reviewed the findings or data of these studies. While there are limitations to these studies that I will discuss shortly, they do provide a general indication of the program's effectiveness. In general, the research indicates the following:

1. There is evidence that the great majority of the tax credits are windfalls to employers who would have hired the disadvantaged target group members anyway. While TJTC-eligible groups do suffer from high rates of unemployment, a large fraction of the eligible population does work--mostly in the kinds of low-wage jobs subsidized by TJTC. Unless employers claiming TJTC subsidies hire workers with more significant barriers to productivity, or pay them more, retain them longer, or invest more in their development than other employers, participating firms collect a benefit with no corresponding gain to the public. Existing studies estimate that from 70 percent to 90 percent of TJTC certifications go to individuals who would have found jobs even in the absence of the credit. The most recent Inspector General's report projects that employers would have hired 92 percent of the individuals even if the credit had not been available.
2. TJTC jobs are almost always low-wage and low-skill, and the typical worker does not remain at these jobs long. Two-thirds of program certifications are in retail stores and restaurants. Nationally, the OIG found that most TJTC jobs were low-skilled and entry-level, with an average hourly wage of roughly $5.15 per hour. Our own administrative data confirm these low wages. What is perhaps even more important is that TJTC jobs are typically unstable and of short duration. The OIG found that the median TJTC-certified worker remains on the job for only about 6 months, and other research has confirmed this finding.

   The combination of low wages and low tenure adds up to low total earnings. According to the OIG, the median TJTC-certified worker receives less than $4,000 in total wages before losing or leaving their job.

3. TJTC participation appears to have little or no effect on earning power or long-term career advancement. A 1991 GAO report did not find substantial differences in earnings resulting from TJTC work experience when compared with work experience of other TJTC-eligible workers who were not certified under the program. According to our own analysis of Census data, there is little difference between the hourly wages of TJTC eligibles who are certified under the program and those that are not.

   Some claim that the work experience gained in jobs subsidized by the credit pays off in better job prospects for the future, counterbalancing the low quality of the immediate jobs. But the evidence does not support this. A 1988 report found that even five years after participation in TJTC, the average annual earnings of minority male youth who had been certified under the program were only about $7,000 per year (1993 dollars), and those of female youth were even less. Also, the Labor Department OIG determined that 35% of TJTC participants were unemployed when they were contacted about a year and a half after entering their TJTC jobs. This compares to 38% in the year before getting the job. Again, there is little evidence of improvement due to TJTC.

4. TJTC accounts for only a small fraction of the employment of eligible groups. Among eligible disadvantaged youth who are employed, only about 10% have been certified for TJTC. Rates of TJTC certification among employed members of other eligible groups are even lower. In other words, more than 90% of employed persons in the eligible population get jobs without using the credit.

I mentioned that although TJTC has been studied before, there are many limitations to these previous studies. Because of its design, the TJTC is an extremely difficult program to rigorously evaluate. Researchers in the field agree that none of the studies to date is a reliable estimate of the total impact of TJTC on employment and earnings of the disadvantaged. None of the evaluations has definitively determined the programs costs and benefits. A comprehensive literature review conducted for the Department of Labor in 1991 concluded that "because of (unavoidable) design difficulties, none of the studies answers definitively the question of the net effects of the TJTC."

I do not raise these research issues to claim that the current TJTC has not been extensively studied. On the contrary, we feel that the weight of the research clearly shows serious problems with the number and quality of jobs generated by the existing program. The recent report by the Labor Department's Office of the Inspector General reinforces this conclusion. As I indicated earlier, we do not believe the TJTC should be extended in its current form.

However, I do wish to make clear that neither the OIG reports nor other studies of the program have established that employment tax credits cannot be a viable approach to assisting the disadvantaged. The existing research evidence certainly does not preclude TJTC reform.

In addition, because of the problems with the current research, should the Congress decide to authorize a modified version of TJTC, a systematic impact evaluation should certainly be required.

If the Congress pursues an extension of the TJTC, it should incorporate changes to the program to address some of the major shortcomings. I believe thoughtful reforms of the program's administration and design can help to turn the TJTC into an effective tool for improving the employment prospects of disadvantaged Americans.

The Administration is analyzing possible reforms in the program that address problems in several areas:

1. Reduce employer windfall. All too often, employers screen for TJTC eligibility and certify their workers only after hiring them. A promising reform in this area is to require eligible workers to gain TJTC eligibility prior to hiring. This reform could require that eligibles receive vouchers (or some other form of certification/referral) from the Employment Service or another government office prior to hiring by the employer.

   In addition to this reform, we also believe that increased enforcement of existing program rules can help to address the problems of employer windfall. However, better enforcement may require increased administrative resources for the Employment Service.

2. Improve the incentive to provide high-quality jobs under the TJTC. I have already described the low quality jobs currently being subsidized by the TJTC. Current program rules -- which offer a substantial subsidy for only the first few months of employment -- may even provide some incentive for rapid employee turnover in order to maximize the credit amount.

   In other words, the current program pays employers to provide the same kinds of low-quality jobs that many eligible workers drift in and out of on their own, without subsidies. And it gives too little incentive to hire and retain workers for the kinds of jobs than can lift them out of the dismal cycle of low-skill, dead end work. We need to reconfigure the program so that it induces employers to provide jobs that can change people's lives for the better.

   One way to shift incentives in the direction of higher-quality jobs is to "backload" the credit. Currently employers receive a credit of 40% of the first $6,000 in wages. A backloaded credit would grant a lower rate of subsidy, or none at all, on the first several thousand dollars in wages paid, but a higher credit rate on additional wages. This would establish a strong incentive to recruit, train and retain TJTC-eligible workers for jobs that last longer, pay better, or both. The specific parameters of a "backloaded" credit could be adjusted to give employers the right incentives while also managing program costs.

   Alternative approaches based on a substantial increase in the current minimum tenure requirement, rather than a backloaded credit structure, could also give some incentives to improve job quality. I would note here that summer youth employees and cooperative education participants should be exempt from any increases in tenure requirements created by these changes.

3. Improve longer-term effects of TJTC jobs. The current TJTC does not provide enough incentive to build worker skills and thus improve their long-term outcomes. Given the importance of skills in shaping employment prospects, there is a strong case for injecting a learning component into a reformed TJTC. One way to do this would be by making the work-based learning slots created in conjunction with school-to-work programs eligible for TJTC subsidies. Less ambitiously, legislative and administrative steps could be taken to make participation in TJTC more accessible for low-income school-to-work participants.

   Besides school-to-work, there is also the possibility of extending the TJTC credit to formal training expenses for TJTC-eligible workers.

4. Improve knowledge of program effects. Finally, we would recommend that if the program is extended in a modified form, that it be temporarily extended rather than permanently reauthorized, and that a rigorous study of its effects be undertaken. This will allow us to determine the impact of any reforms that are made. Using new techniques and data sources that have not been available to previous researchers we would be able to determine much more definitively the total impact of the revised TJTC on improving the employment prospects of the disadvantaged. This will help to address current uncertainty about the TJTC's cost-effectiveness.

We are prepared to discuss the pros and cons of each of the issues I have raised today with Congress as part of an effort to reform the TJTC. We have presented these potential reforms here as a starting point for discussion. The details of the options have not been fixed, nor have we done formal cost estimates. However, we do believe that each of these proposals represents an improvement on the current state of the TJTC program.

Of course, the Administration's position on specific proposals will depend on the overall package, and on what offset is used to finance the reauthorization.

But let me finish by emphasizing that I share your commitment to the goals the Targeted Jobs Tax Credit is meant to serve, Mr. Chairman. Precisely because the goal is so vital, we must be relentless in analyzing, improving, and monitoring the means by which it is pursued.

Mr. Chairman, this concludes my prepared statement. At this time I would be pleased to answer any questions that you or other Members of the Subcommittee may have.