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Subsidized Jobs: Providing Paid Employment Opportunities When the Labor Market Fails

April 2, 2014

In the very tight labor market of the late 1990s, employment among some of the most disadvantaged individuals reached levels never seen before.  For example, of working-age never-married mothers with a high school education or less, 76 percent worked in 2000, up from 51 percent in 1992.   But even then, labor demand was not sufficient for everyone in the labor force to find work — almost one-quarter of this group did not work at all during the year even though many of them faced significant pressure from welfare agencies to do so.  A large-scale national subsidized employment program — in which the government creates jobs and pays the wages of individuals who are unable to find work in the regular paid labor market — may offer the best opportunity for filling this gap.  The recent experience of states implementing subsidized jobs programs with funding from the Temporary Assistance for Needy Families Emergency Fund (TANF EF) demonstrates that, with adequate funding, states are capable of operating such programs and have the ability to get them up and running quickly.   A recent study of several of the TANF EF subsidized employment programs provides evidence that these programs increased employment and earnings not only while individuals worked in a subsidized job but also after the program ended.  

We also know from recent experience that these programs can be operated at a reasonable cost, offering a solution that could provide greater benefits than costs over the long term.  Assuming an average cost of $10,000 per subsidized job, an investment of $1 billion per year could cover the creation of about 100,000 subsidized jobs each lasting an average of six months and paying about $10 per hour.  Under the TANF EF, some states provided subsidized jobs at much lower cost, so a $1 billion investment could potentially create even more subsidized placements.  (See Appendix Table 1.)  Funds from the regular TANF Contingency Fund, which was created in 1996 to provide extra funds to states during times of economic need and is currently funded at $612 million per year, and the Work Opportunity Tax Credit, which offsets about $1 billion in taxes for businesses that hire individuals deemed hard to employ, could potentially be redirected to offset the costs of such an initiative.           

In general, full employment has been the exception rather than the rule in the U.S. economy.  Thus, while the current economic situation provides clear evidence for why a subsidized jobs program is needed now, it would be a mistake to think that the benefits of such a program could be realized only during times of exceptionally high and sustained unemployment.  Instead, what is needed is a program that expands when the economy is weak and contracts when labor demand is stronger.  The current labor force participation rate and the long-term unemployment rate show how much the sluggish economy has taken its toll on American workers.  In December 2013, the labor force participation rate was just 62.8 percent, the lowest it has been since 1978, and nearly two-fifths of the unemployed — 3.9 million people — had been looking for work for 27 weeks or longer, a level not seen since the 1940s.   Given the current state of the economy, it is likely that many people will be out of work for a long time to come.  But even as the economy strengthens, some groups will continue to fare poorly without some additional assistance.  These groups include individuals with limited education and work experience, young people making the transition to adulthood, racial and ethnic minorities (especially young African American men), individuals with disabilities, and individuals with a criminal record, among others.  A subsidized jobs program could provide paid work opportunities for these individuals when their attempts at finding employment in the regular paid labor market fail, as they often do. 

Subsidized jobs programs share three characteristics that make them an attractive component of any agenda to reach full employment.  First, subsidized jobs provide a strategy for increasing employment quickly.  Second, with proper targeting, the benefits will accrue to the individuals who are least likely to find employment on their own and may increase the chances of these persons of finding unsubsidized employment when the subsidy ends.  Third, a federally funded, large-scale subsidized employment program can provide a boost to local economies. 

The full report is available here in PDF format.