BEE Partner, South Africa Economy Watch

ADDITIONAL ASPECTS OF PSE

One of the chief limitations of the PSE approach is that PSE subsidies may bemisdirected when used by state or local governments to pay employees already hired, or workers who would have been hired in the absence of the program. This kind of ‘fiscal substitution’ appears inherent in a PSE approach because it functions as a disguised form of revenue sharing.

A study prepared under the auspices of the National Planning Association estimated a fiscal substitution effect of 0.46 after one year. Subsequent studies produced conflicting results, but verified that the fiscal-substitution effect can be substantial (Bergman and Bennett, 1977). The greater the substitution of federal funds for state and local funds, the less effectively PSE will operate as an employment program. There is also evidence that the persons who were hired into public service unemployment were predominantly whites with nine or more years of education (Johnson and Tomola, 1978). Their human competencies and experience suggest that they are likely to have a better than average chance of finding jobs in the private sector. However, once placed in public service, these persons presumably have less time and less incentive to search for private sector employment, so their employment in the public sector may discourage their search for private sector employment. Their employment in the public sector may also represent a less productive use of their capabilities than would result from private employment could it be made available.

The fact that a high proportion of persons placed into public service employment are not truly disadvantaged appears to be associated with the tendency for public service employment legislation to create jobs of a type more typically associated with permanent careers. The more career-oriented public service jobs become, the more difficult for the jobs created to be temporary. In principle, a public employment program (ELR) should thus be phased out in a counter-cyclical fashion. This type of timing would mean that the jobs created be those that require only very short and non-specific training and that they lend themselves to being filled by persons of various ages with a wide range of previous training and experience. It is clearly difficult to plan a program that incorporates all these features. It is, however, worth recognizing that, while the fiscal-substitution effect limits the effectiveness of the PSE program as an unemployment-reducing tool, it may nevertheless be effective as an antipoverty program if it alters the composition of employment to favor disadvantaged workers.

The Impact of a Tax Cut as an Alternative Employment Policy

A tax cut can, in principle, be used as an alternative to public service employment. The critical question at issue is the relative efficiency of the two mechanisms for creating increments of employment. The Council of EconomicAdvisors addressed itself to this question by estimating the number of job_screated and paid for under a $1 billion Public Service Employment program as compared with an equivalent federal tax cut (Chiswick and O’Neill, 117). It was estimated that a $1 billion PSE program could pay for approximately 110,000 job opportunities at $9,000 per job. However it was also estimated that a portion of these jobs would merely displace jobs normally generated by state and local governments without federal aid. On the basis of past experience, it was estimated that only initially does a PSE program create more jobs than can be achieved by means of a tax reduction. This is the case because, unlike the effect of the PSE program, the performance-effect of a tax cut continues to increase. If the objective of a program is to increase aggregate employment as much and as rapidly as possible, a PSE program can be more effective in the short run (per unit of budget deficit), than any other type of fiscal policy, if the fiscal-substitution effect is small (Bergman and Bennett, 1977). This is important to recognize because time is of the essence when an economy is confronted with a serious unemployment problem. Delay is likely to increase the magnitude of the problem, thereby expanding the magnitude of the effort that is required to halt the contraction of employment. Thus, the speed of the impact of the policy must be considered as much as its size in guiding the choice between PSE and tax cuts as employment-policy tools.

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