February 11, 2013 / 7:20 PM / in 5 years

Weak demand, not tax worries, keeps firms from hiring: Fed paper

SAN FRANCISCO (Reuters) - Tax and regulatory uncertainty, blamed in some quarters for keeping companies from hiring, has little to do with high U.S. unemployment, according to research by the San Francisco Federal Reserve Bank published Monday.

The main reason that U.S. unemployment has remained high is likely because households hurt by the housing crash simply are not spending, according to the research, published in the latest issue of the San Francisco Fed’s Economic Letter.

U.S. unemployment stands at 7.9 percent more than three years after the end of the Great Recession.

Focusing on the reasons businesses cite for not hiring, the study’s two authors -- Atif Mian, a Princeton University professor who is currently a visiting scholar at the San Francisco Fed, and Amir Sufi, a professor at the University of Chicago Booth School of Business -- found no correlation between worries about regulation and taxes, and employment growth.

“Employment collapsed precisely when businesses began worrying about poor sales,” they said. By contrast, “there was almost no correlation between job growth in a state from 2008 to 2011 and the increase in the percentage of businesses citing regulation and taxes as their primary concern.”

Indeed, states where businesses increasingly cited regulation and tax worries actually had greater job growth than states without such intensifying concerns, though the correlation was not statistically significant, they said.

Clashing views about the reasons for high U.S. unemployment have been at the heart of the debate over U.S. monetary policy, which has gone far into uncharted territory with interest rates held near zero for more than four years now and the purchase of $2.3 trillion in long-term assets to push borrowing costs down further.

The Fed last month reiterated its pledge to keep rates ultra-low until the unemployment rate falls to 6.5 percent, as long as inflation does not exceed 2.5 percent.

Some, including Richard Fisher, president of the Dallas Fed, argue that tax and regulatory uncertainty is the main reason businesses are not hiring, suggesting there is little that Federal Reserve monetary policy can do to induce hiring.

The study from the San Francisco Fed bolsters the view that combating unemployment is primarily about boosting demand rather than about providing certainty on tax and regulations.

Reporting by Ann Saphir; Editing by Leslie Adler

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