New York Times Editorial: Give Employees The Tax Credit

Today's New York Times has an interesting Op-Ed by Sarah Hamersma, assistant professor of economics at the Warrington College of Business Administration at the University of Florida, questioning the link between a federal minimum wage increase and an extension of the Work Opportunity Tax Credit:

First, most eligible companies don’t take the credit, which averages about $1,000 for each employee who belongs to one of the specified categories of workers (for instance, recent recipients of welfare or food stamps). Even though national surveys show many such workers being hired, employers claim the credit for less than a third of them.

Second, there is no evidence that employers have hired more eligible workers as a result of the program. Indeed, according to a number of studies — including one by the Department of Labor, another surveying 101 temporary help agencies, and a statistical analysis of welfare recipients in Wisconsin — the credit seldom influences hiring decisions of participating firms. Many companies wish to avoid preferential hiring, even though the policy is explicitly intended to give disadvantaged job seekers an advantage in the labor market.

Is it a good idea to extend this program, even though it hasn’t meaningfully improved the employment picture for disadvantaged workers? But suppose such a program had even a small effect. Would it undo the negative consequences of a minimum wage increase? The answer is no, for two reasons.

First, data from Wisconsin show that fewer than 25 percent of workers claimed under the credit are earning the minimum wage.

Second, large corporations are the most active participants in the program. In 1999, the average participating corporation received more than $100,000 in credits. The Senate bill, however, is supposed to support small businesses, which have never taken advantage of the Work Opportunity Tax Credit in large numbers, but are the most likely to suffer under the proposed minimum wage increase.

She goes on to make a logical case that a more effective way to help low-income earners would be to provide or enhance subsidies that go directly to the employee:

There’s a more direct path to improving incomes for the working poor. Instead of requiring employers to pay more, and then allowing them to apply for reimbursement through tax subsidies, why not skip the middleman and subsidize the worker directly?

Such a program already exists. The Earned Income Tax Credit is a federal tax refund for workers, who qualify based on family income rather than individual income or wages. This means that an upper-class teenager working at McDonald’s will not get a benefit, but someone trying to support a family will.

California's Enterprise Zone statute includes a credit that is intended to be available directly to an employee working in a zone. However, since it was very small to begin with, and the applicable numbers are now 20 years old, the credit is essentially impossible to implement even for an individual earning the minimum wage. Perhaps this is an area that the legislature should look into.