March 1999, Vol. 122, No. 3
The incentives benefit
Democracy at work
Book reviews from past issues
The incentives benefit
Industrial Incentives: Competition Among American States and Cities. By Peter S. Fisher and Alan H. Peters. Kalamazoo, MI, W.E. Upjohn Institute for Employment Research, 1998, 307 pp.In recent years, a debate has been taking place among economic development professionals and elected officials about the use of incentives to entice companies into a community. Some States and cities have been willing to give a large amount of dollars to companies to persuade them to relocate. The Mercedes-Benz plant in Alabama is an often cited example (the authors use it as well). Companies are taking advantage of the incentive game played by the States and cities and expect a benefit from relocating.
Incentives can range from cash up-front to performance-based tax abatement, where companies will receive their benefit after showing that they hired the promised number of people. Incentives can also be given to a community for infrastructure improvements, such as the State of Florida Economic Development Transportation Fund (Road Fund), or to companies to train newly hired employees at a local educational institution (State of Floridas Quick Response Training Program).
Because of the wide variety of incentives and types of programs that administer these incentives, it has been difficult to compare these incentives by States or cities, in particular their dollar-value benefit. If comparisons are made, it is usually done by looking at the number of incentives offered by a State or city, or when possible, the type of incentive. Looking at the actual benefits generated by incentives has hardly been researched.
Fisher and Peters, in their book, Industrial Incentives: Competition Among American States and Cities, developed the Tax and Incentives Model to compare States and cities incentive programs by focusing on the financial benefits generated by incentives. These authors chose 24 States that have the highest level of manufacturing in the United States. Then they randomly picked 112 cities with 10,000 population or more in these 24 States. The Tax and Incentives Model was applied to these States and cities.
The Tax and Incentives Model uses the hypothetical firm method to assess the incentive benefits. The hypothetical firm method entails the creation of fictitious companies for several manufacturing industries, including data for financial statements. The authors use this method to avoid the shortcomings of other methods used to compare incentives, such as aggregate measures of State tax levels for counting incentive programs. The latter is often difficult because many incentives might seem similar or have similar names, but are administered differently and, therefore, a company would not receive the same benefit from similar incentives, making comparisons difficult. In addition, the model takes a longer view when applying the incentives to the hypothetical companies by looking at past and future revenues and taxes paid (property and sales taxes). This is something usually not done in other models.
The authors go to great length to outline the different incentives and how they fit in the model. Some incentives are so specific to a particular community or are available to any community, such as the Community Development Bloc Grants, that there is no difference in benefit and, thus, were not included in the model. Once they established the types of incentives to use in the model, they apply the collected data from the States and cities chosen.
One of the findings of Fisher and Peters, after collecting and analyzing the data on the 24 States and 112 cities, is that high-tax States and cities do not necessarily have the highest incentives available. Another finding is that there are great differences among States and cities in the tax burdens they pose on companies and the incentives they offer. These differences seem to be large enough to cause clear (re)location decisions. The authors also examine the relation between incentives, taxes, and unemployment levels in States and cities. The data showed that States with low unemployment levels often offer low incentives and could have high taxes. The correlation between level of taxes and incentives offered and the unemployment levels are in most instances very weak. Both cities with high unemployment and low unemployment might gain new jobs through their incentives. Fisher and Peters show through their model that incentives do not cause redistribution of jobs; in other words, incentives in high-unemployment areas might not attract new companies and incentives in low unemployment areas might attract new companies and jobs, even though there is no urgent need for additional jobs.
With the results of the Tax and Incentives Model, the authors examine the policy implications of the effectiveness of incentives and in many cases the lack thereof. After looking at the 24 States and 112 cities regarding the incentives offered and the return on investment, Fisher and Peters conclude that most of these States and cities fall in the middle group and therefore, other factors, such as labor cost, quality of life, and labor force skills, could be the deciding reason for a location or relocation. The authors are aware of the fact that other factors often play an important role in the location decision of the company. Some of these are very difficult to quantify and these types of factors are not included in the Tax and Incentives Model. An example is the location preference of the companys CEO because he or she would like to live in that location. This concluding chapter gives an overview of the policy debate in the United States regarding incentives and the possible solutions brought forward by economists, such as reducing the use of Federal money for incentives. The authors do not give clear suggestions, realizing that incentives are given at different levels and that no community using incentives in attracting companies wants to be the first to end the use of incentives in economic development. The debate will continue. The books importance in this debate is that it attempts to clarify and demystify the use of incentives by analyzing the availability and benefits of incentives in a scientific manner.Jaap Donath
Public Policy Toward Pensions. Edited by Sylvester Schieber and John Shoven. Cambridge, MA, MIT Press, 1997, 326 pp. $40.As the baby-boom generation, the huge cohort of Americans born between 1946 and 1964, approaches retirement age, there has been considerable debate about whether the Social Security system will be able to provide the promised level of benefits to so many people. This discussion has taken place in the news media, in political campaigns, in the corridors of power in Washington, and in factories, stores, offices, and homes across America. A thorough analysis of the Social Security systems financial health appears in Public Policy Toward Pensions, but readers of this book will find much more than a discussion of Social Security.
The books 10 chapters, written by a dozen of the foremost experts on retirement plans, dissect all of the important issues related to the retirement income of baby-boomers and the generations that follow. In addition to Social Security, these issues include regulatory and tax policy on employer-provided retirement plans, government budget deficits, the national savings rate, government insurance of defined-benefit plans, the shift from defined-benefit to defined-contribution retirement plans, the management of public-employee pension plans, and the adequacy of retirement income. Rather than simply describing each of these issues in isolation, the editors, who authored four of the chapters themselves, tie all of the issues together to show how complex the U.S. retirement system really is. The authors present a strong case that changes made to one facet of the retirement system can have a far-reaching impact on all the other facets.
The first two chapters of the book note a significant shift over time in the emphasis of regulatory and tax policy toward retirement plans. For many years, most Federal regulations and tax laws regarding retirement plans were designed to encourage employers to offer benefits to wider groups of workers or to ensure the security of the benefits already promised to workers and retirees. One policy used to encourage retirement plan coverage is to defer taxation of pension plan contributions and investment income until employees receive the money during their retirement. Under this policy, workers would prefer to receive more of their compensation in the form of tax-deferred pension contributions and other tax-exempt benefits and less compensation in the form of wages and salaries, which are taxed at the time they are received. The implied loss of revenue to the Federal Government from delaying taxation on pension plan contributions and their earnings is referred to in the book as a form of "tax expenditure."
As the Federal budget deficit grew rapidly in the 1970s and 1980s, policy- makers began to look for ways to increase Federal revenues and reduce spending. One area policymakers focused on was the "tax expenditures" of pension plans, which were estimated at $54 billion in fiscal year 1994. Beginning in the early 1980s, the emphasis of Federal policy toward employer-sponsored retirement plans shifted away from expanding coverage and protecting benefits and toward minimizing the tax expenditures of retirement plans. As a result of this shifting emphasis, a series of laws, beginning with the Tax Equity and Fiscal Responsibility Act of 1982, reduced the tax benefits that had been granted to employer-provided retirement plans. The authors argue that these laws made retirement plans less attractive for employers to offer, and this ultimately may jeopardize the income security of workers when they reach retirement.
The authors assert that many of these laws also affect the national savings rate. They note that savings finance the investments necessary to raise productivity, real wages, and national wealth. The authors document the decline in the national savings rate since 1980 and note that pension plans account for a sizable share of national savings. In fact, pension plan assets account for nearly one-fourth of national wealth. The authors point out that Federal budget deficits reduce national savings, but they say that deficit-reduction strategies that discourage businesses and individuals from saving through retirement plans and other means also reduce national savings. Such policies in turn harm the Nations potential for future economic growth, in addition to jeopardizing retirement income security.
One chapter of the book analyzes the problems with the Pension Benefit Guaranty Corporation (PBGC), which was chartered by the Congress in 1974 to insure the benefits retirees have been promised to receive from defined-benefit retirement plans. If a private-sector employer cannot meet its obligations to pay pension benefits, PBGC takes control of the plan and assumes the responsibility for paying benefits. The author of the chapter describes several problems that limit the effectiveness of the PBGC. One problem is that the insurance premiums employers pay to the PBGC do not adequately reflect the risk that the PBGC bears in guaranteeing the liabilities of pension plans. As a result, healthy employers that pose little risk of defaulting on their pension obligations subsidize weaker employers that have greater default risk. The author argues that some of the healthiest employers may avoid subsidizing weaker firms by deciding not to offer defined-benefit plans. Instead, they may offer defined-contribution retirement plans, which are not insured by the PBGC and shift financial risks from employers to workers. Some firms, the author suggests, might decide to drop their retirement plans altogether. The result is that the overall retirement coverage rate may drop, and only the financially weakest firms may continue to offer defined-benefit pensions. The author fears that if the system is not reformed, taxpayers ultimately may have to provide PBGC with the money needed to cover the liabilities of poorly funded pension plans. The author notes that when the PBGC was established, a private pension insurance market did not exist, partly because potential insurers lacked sufficient information on actuarial risks. Given the many financial innovations that have occurred in the past two decades, along with the considerable amount of actuarial data developed by the PBGC, the author believes that creating a competitive private market for pension insurance is now economically viable and indeed is necessary to protect taxpayers and retirement plan participants.
Public Policy Toward Pensions is not for the casual reader. Instead, it is geared toward policymakers and others who already have considerable interest in pension policy. The book is very thorough and frank in its discussion of the problems facing Social Security and the private retirement system, but it is not alarmist. Indeed, the authors offer a number of specific proposals that they believe can solve the problems. The authors concede that some of their proposals will evoke controversy, but they emphasize that the longer policymakers delay implementing these solutions, the more drastic they will have to be.Joseph R. Meisenheimer
Democracy at work
Unions and Workplace Reorganization. Edited by Bruce Nissen. Detroit, MI, Wayne State University Press, 1997, 240 pp. $22.95.This book continues the debate over whether labor-management cooperation serves the interests of workers and unions in the United States. Contributors include academics in the fields of industrial relations and labor education, students, workplace consultants, and others. After a lucid introduction by the editor, the first chapter presents the landmark 1994 statement of the U.S. labor movement on work organization, "The New American Workplace: A Labor Perspective," issued by the AFL-CIO Committee on the Evolution of Work.
In itself the republication of this document is useful. Further, it provides a specific context around which the rest of the book is focused, as a variety of contributors critically assess the theoretical and practical utility of the federations approach in a number of settings. For example, Peter Downs argues that the efforts at GMs Wentzville (MO) assembly plant in the 1980s fell far short of involving workers in meaningful decision making. A successful program, in his view, will involve union goals that are independent of managements; a democratic, open process of decision making; and accountability. Maureen Sheahan, who studied another UAW endeavor, the Labor-Management Council project in Michigan, agrees that "beginning from a recognition of the distinct agendas" of labor and management is key. The Council she describes has provided training and information to help individual workplaces in Michigan resolve conflicts and find common ground.
Mae M. Ngai describes worker education conducted through the Consortium for Worker Education in small and medium-sized manufacturing firms in New York City. Training in that context involved a complex combination of skills training (for example, English as a second language), teamwork, technology, and developing rank-and-file leadership. In all the cited examples of jointly-developed training, Ngai points out: "unions took positions based on a general commitment to productivity, quality, and cooperation with management, all nontraditional concerns for unions. At the same time, their positions were based on basic trade union principles of safeguarding jobs and demanding that the employer respect workers knowledge, interests, and rights to have a voice in the workplace."
Two helpful chapters in the book review new developments in public sector labor-management cooperation. Edward L. Suntrup and Darold T. Barnum examine the creation of partnerships in the Federal Government. President Clintons Executive Order 12871 of 1993 established the National Partnership Council comprising union and agency representatives at the national level. Its duties include the creation and support of labor-management partnerships in the executive branch; further, heads of agencies are directed not only to form such partnerships at appropriate levels, but also to negotiate over the subjects set forth in section 7106(b)(1) of the Federal Service Collective Bargaining Statute, chapter 71 of title 5, United States Code. The authors praise this "widening of the scope of bargaining," expressing the belief that its implementation will "render moot, in one fell swoop, many aspects of a pattern of legal bickering in Federal labor-management relations that has been going on since 1962 involving control of decision making over a whole plethora of issues ." Many observers view the effects of Executive Order 12871 as positive; however, it is clear that disputes over the scope of bargaining have not withered away. Evidence for this assertion can be found in the persistent litigation in this area before the Federal Labor Relations Authority, which is charged with administering the statute, as well as in documents such as the detailed memorandum of guidance on bargainable issues recently published by the FLRAs General Counsel.
A chapter by Lee Balliet discusses labor-management partnerships in State and local governments, in particular as revealed by the work of a recent task force appointed by then U.S. Department of Labor Secretary Robert B. Reich. The task force, made up of political leaders, academics, union and management representatives, and neutrals, highlighted numerous examples of how the quality, delivery, and cost-effectiveness of public services have been enhanced by labor and management working together in an atmosphere of trust, a willingness to take risks, and a focus on problem solving. The task force report (U.S. Secretary of Labors Task Force on Excellence in State and Local Government Through Labor-Management Cooperation, 1996, Working Together for Public Service) was based on extensive expert testimony and direct study of dozens of sites across the country, including a highway department in New England, a State judiciary in the Mid-Atlantic, a middle school and a sanitation department in California, public safety workers in the South and Southwest, and utility workers in the Northwest.
Balliet also gives special attention to State efforts in Indiana, in which he was directly involved. He concludes that "The detailed experience of the Indiana labor-management project suggests that there is indeed a community of interest among organized workers and management in public workplaces that is distinct from private sector employment . This is not to suggest that issues of authoritarian control over decision making and the organization of work are any less problematic in government. Rather, it is the context of political outlook, position and coalitions in the public sector that for organized public employees, creates a greater potential for change."
"Opposing viewpoints" are presented in two chapters by Peter Lazes and Jane Savage, and Mike Parker and Jane Slaughter, respectively, which echo some of the caveats laid out by Jim Grattan in an earlier chapter. Lazes and Savage fault the New American Workplace document for not clarifying "the AFL-CIOs role in developing partnerships and new work systems," and advocate revising the national labor relations laws, increasing labor education and outreach and supporting research that documents what works and what doesnt. This strategy, they say, "is centered upon a clear identification of the unions interests. We believe that union-driven workplace changes should be a central part of a new union agenda." Similarly, Parker and Slaughter posit that "the conflict of long-term interests between companies and their workers is both fundamental and primary." In their view, the New American Workplace report exemplifies "wishful thinking," and that changes in work organization should be sought primarily so that unions can increase their power vis-à-vis management.
This reviewer believes that the skepticism about the AFL-CIOs role and the benefits of cooperation for workers expressed in these chapters is somewhat overdone. As Adrienne E. Eaton of Rutgers notes in her chapter comparing the American document to labor organization pronouncements in the United Kingdom, Australia, Denmark, Sweden, and Germany, the role of the central union federation in the United States differs substantially in power and influence from that in other nations. She cites the AFL-CIOs creation of a new Center for Workplace Democracy, however, as evidence of its intent not only to take a more proactive role in the field but also to balance such efforts with the acknowledged interests of workers and unions in increasing union strength. This intent is echoed in the AFL-CIO Executive Councils 1997 statement on Workplace Democracy:
[We] want to assist our unions to have increased and integrated influence in the following areas: essential business strategies and policy decisions; employers resource commitments; quality standards; the way we work; the design, introduction and utilization of technology; and education and training needs . Genuine workplace democracy rests on a foundation of collective bargaining. We want American employers to prosper by benefiting from workers insights and knowledge through creating good union jobs for American workers, their families and communities.
Thus, the federation seems to be moving to ensure not only the successful implementation of workplace democracy but also its development in a way that supports, rather than undermines, the representational role of labor unions.
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