How To Create More Jobs

Reduce Interest Rates

job creation — U.S. Secretary of the Treasury Jacob Lew (R) listens to Chair of the Federal Reserve Janet Yellen (L) during a meeting of the Financial Stability Oversight Council May 19, 2015 at the Treasury Department in Washington, DC. The preliminary agenda for the meeting includes a discussion of the Councils 2015 annual report and a discussion of charters for the Councils committees. Photo by Alex Wong/Getty Images

Expansionary monetary policy is when a central bank, such as the Federal Reserve, uses its tools to stimulate the economy—often lowering the fed funds rate to increase the money supply, which increases liquidity and gives banks more money to lend. As a result, mortgage and other interest rates decline. With cheaper credit, consumers can borrow and spend more, allowing businesses to expand to meet the increased demand. This increased demand lets companies hire more workers and give them more purchasing power.

The Fed can also increase the money supply through quantitative easing, which is when it creates credit out of thin air to buy U.S. Treasurys, mortgage-backed securities, and any other kinds of debt. They can quickly put trillions of dollars into the economy by making credit available without increasing the U.S. debt. They also have many other tools, such as lowering the federal reserve requirement and lowering the rate on the discount window—which should be done first when a recession is looming because decisions can be made quickly through the regular Federal Open Market Committee meeting.

The main disadvantage of this is that it relies on bank lending and doesn't directly put money into consumers' pockets. It can take six months or more to stimulate demand. It also doesn't work once a severe recession is underway because there won't be much demand for loans. If people feel too poor to borrow, it doesn't matter how low interest rates are. If the recession continues, banks become unwilling to lend because borrowers' credit scores fall. Another downside is that expansive monetary policy can trigger inflation if overdone. To prevent that from happening, the central bank must begin raising rates as soon as the recession is over.

Spend on Unemployment Benefits

Woman shopping at supermarket — The living wage will pay for enough food, clothing and shelter. Laflor/E+/Getty Images

Another cost-effective solution is unemployment benefits. According to a 2010 study, unemployment benefits increased employment on average by 1.6 million jobs each quarter from mid-2008 through mid-2010. Unemployment benefits create so many jobs because the unemployed must spend all the benefits received, and they tend to buy necessities such as groceries, clothing, and housing right away. Retailers and manufacturers respond to the added demand by hiring more workers to keep up.

These benefits also help keep the unemployed from becoming homeless. It is more difficult for them to find a job if they lose a steady address.

Cut Business Payroll Taxes for New Hires

A payroll tax cut that targets hiring works best. Photo: Inti St Clair/Getty Images

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. For example, a Congressional Budget Office study found that while 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 tax savings in one of four ways, all of which increase the demand needed to drive job growth:

Reduce prices
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. 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. This is why so many people favor payroll tax cuts as the best form of tax cuts.

Defense Spending and Job Creation

Marines from the 3rd Marine Aircraft wing walk by a V-22 Osprey during a ceremony on Friday, February 18, 2011 at MCAS Miramar Marine base in San Diego, CA. Photo by Sandy Huffaker/Corbis via Getty Images

When people think about the best way for the government to create jobs, they tend to think of World War II. According to a University of Massachusetts Amherst study, defense spending only creates 8,555 jobs per $1 billion spent—a finding that surprises many people.

It made sense back then because World War II was much more labor-intensive than today's defense spending. Now, more is spent on drones, F-16s, and aircraft carriers than the salaries of military personnel. Also, there were no unemployment benefits during the Great Depression, so the job creation ability of government spending now may not be able to offset the true cost of war.

When to Use Expansionary Fiscal Policy

Presidents Clinton, Bush, and Obama — President Clinton didn't use expansionary fiscal policy as much as Presidents Bush and Obama did. Photo by Getty Images

Expansionary fiscal policy works best once a recession is underway or becomes severe. Tax cuts create jobs by putting more money directly into the pockets of consumers and businesses. Discretionary spending creates jobs by directly hiring workers, sending contracts to businesses to hire workers, or increasing subsidies to state governments so that they don't have to lay off workers.

One disadvantage of fiscal policy is that legislators disagree on whether tax cuts or increased spending is more cost-effective, which can delay action. Congress should cut spending or raise taxes once the recession is over.

Job Creation Statistics

When looking at job creation statistics, remember that not all jobs are created equal. Federal spending on public works creates construction jobs, which will successfully reduce the unemployment rate, but it may not stimulate as much demand as it would if the same number of better paying high-tech jobs were created.

In fact, jobs created after the last few recessions have led to greater income inequality because rehired workers became willing to take jobs that paid less. The high level of long-term unemployed and underemployed individuals in this recession means that this trend will only continue. For month-by-month job creation statistics since 2008, see Employment Statistics.