Wednesday, January 8, 2014

Policies That Discourage Full-Time Work

Copyright, The New York Times Company

The payroll tax holiday was an important factor helping the workweek recover after the recession, but the holiday is over and new public policies are pushing in the other direction.

Full-time positions pay more than part-time positions, even on an hourly basis.  Part-time positions require less time away from family, schooling, etc., which makes the choice of full-time versus part-time work a trade-off between income received and the amount of the time commitment.

A higher income tax or payroll tax rate tilts the balance toward part-time work because it reduces an important benefit of full-time work: extra income to spend. A lower rate does the opposite.

You might say that work schedules are set by employers, and that workers have no say in the matter.  But that ignores the fact that employers compete for employees, which is why many employers spend resources to offer health coverage, flexible scheduling and other fringe benefits that employees find attractive.

Historically, employers have responded to high income tax rates by creating part-time positions, especially when large numbers of potential employers were facing those rates.

For many years, the Social Security earnings limit reduced the reward to full-time work among elderly people, because a large part of their Social Security benefits were withheld when beneficiaries earned more than the limit.  As a result of the income tax implicit in the Social Security rules, many businesses created part-time positions that were attractive to older workers because their earnings stayed below the limit, and many accepted them.

Between 2007 and 2010, expansions of the food stamp program, known as SNAP, made part-time work increasingly attractive for those who would face the program’s income limit if working full time. About the same time, federal mortgage modification guidelines acted as income-tax increases on homeowners who owed more on their mortgage than their home was worth, because the more the homeowner earned, the less the mortgage balance was reduced. As a result, a few people found part-time work to be a more effective way of cutting their debt.

I have quantified the disincentives for full-time work and their evolution, accounting for the fraction of the population taking part in these and other programs and showing the results in the chart below.  A higher tax rate means less incentive to work full time and more incentive to work part time.

Source: Author's calculations. Source: Author’s calculations.

Between 2007 and 2012, there had been little net change in the tax rate on full-time work because the 2011-12 payroll tax holiday largely offset the increases from SNAP and mortgage modification. I think this is an important reason that weekly work hours recovered from the recession much more quickly than employment has.

But a year ago the payroll tax holiday expired and, more important, beginning this week incomes earned will reduce the subsidies that families might hope to receive as part of the new insurance plans created by the Affordable Care Act.

For these reasons, the recovery of the workweek from the recession cannot be taken for granted.

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