Assessing WOTC: Executive Summary

The Work Opportunity Tax Credit (WOTC) was created to address the problems of the chronically unemployed and to do so by helping them get jobs. The mechanism behind the program is to give tax credits to employers who hire individuals targeted by WOTC, effectively subsidizing the cost of hiring and employing them.

The central idea behind the program is that getting a job helps break the vicious cycle affecting these individuals, who often find that a lack of job experience prevents them getting hired. The central idea behind the mechanism used by the program is that these employment subsidies leverage private funds, adding enough assistance to tip the balance so that employers hire the targeted applicants.

In the analyses below, I review relevant evidence to assess whether the WOTC program is successful in its goals. Addressing that question begins by recognizing that there are at least three different standards used in assessing success: Does the program generate statistically significant improvements in desired employment outcomes? Are those outcomes big enough to be meaningful? Are the results cost effective – are they better than what could be achieved through other means, and how do the benefits stack up against the costs?

The goal of WOTC is to get targeted individuals into jobs, which is different than the goal of creating new jobs associated with other employment subsidies. The jobs do not have to be permanent to provide the desired effect of offering work experience, although it would be troublesome if employers “churned” through existing employees – laying them off to hire WOTC-subsidized applicants.

There is very little direct evidence on the WOTC program per se, so the analysis here also uses evidence for programs that are similar to the WOTC. That evidence shows:

  • That targeted wage subsidies appear to be among the most effective – for some analysts the most effective – labor market policy for getting individuals into jobs.
  • US specific evidence shows that the effects of WOTC and similar programs on targeted individuals are uniformly positive: significant effects on the probability of getting jobs, of length of employment, on wages, and on tenure (the studies do not all find the same effects, but all the effects are positive).
  • The benefits to taxpayers from moving a targeted individual into a job are meaningful. Indeed, a reasonable estimate is that those benefits are easily twice the magnitude of the maximum subsidy payment, suggesting that the WOTC quite likely more than pays for itself.

In terms of potential negative effects:

  • The evidence seems strong that employers who use the WOTC program are adjusting their hiring and employment practices to the targeted individuals. In other words, it does not appear that they would have hired such individuals even without the program: It is not a windfall for them, although they may well capture a great deal of benefit from the subsidies.

  • There is no evidence that employers “churn” their workforce to exploit the subsidies. While the idea behind the program is to get employers to prefer targeted to non-targeted applicants, there are reasons for believing that negative effects on non-targeted applicants are less of a concern because many applicants for jobs are already employed.

  • The increase in the probability of targeted individuals getting employed is relatively modest because the size of the program is small relative to the population of potential applicants.

  •  On the other hand, the cost-effectiveness of the program is quite high because subsidies are only paid when targeted individuals are placed in jobs.

Click here to read "A Detailed Assessment of the Value of WOTC" in full.