Dean Baker: Employer-Side Payroll Tax Cut Won't Increase Hiring
June 23, 2011 - 6:03pm ET
Giving companies money does not mean they'll hire.
Especially when they have record amounts of cash, like they do now, companies are more likely to use additional capital to re-invest in assets, re-purchase stock, and do other non-hiring-type activities.
That's what Jared Bernstein said in a really convincing takedown of tax repatriation holiday that would temporarily let corporations pay a 5 percent tax rate if they brought offshore assets back to the United States. There's just no guarantee that these companies would take advantage of the tax cut to invest in expansion and hiring, and plenty of reasons to think they would not.
Shouldn't the same logic hold true for the employer-side payroll tax cut? While CBO estimates that an employer-side payroll tax cut would get stimulus bang for its buck, there's no guarantee that it will spur hiring.
Dean Baker, Co-director of the Center for Economic Policy and Research, confirmed my hunch:
My guess is that [companies] do almost no hiring in response to a payroll tax cut. There is a considerable amount of research showing that increasing the minimum wage by about 15 percent has no noticeable effect on employment. If raising the cost of hiring by 15 percent has no measurable effect on labor demand, then we can't think that lowering the cost by 6.2 percent will have a noticeable effect. In short, the evidence suggests that demand is not very responsive to limited changes in the wage.
In short, just as raising the minimum wage a significant amount, which deprives employers of cash, wouldn't put a damper on hiring, so too, giving employers a much smaller percentage of cash through the payroll tax cut, wouldn't spur hiring.
Baker also said that employer gains would probably not go to higher wages for companies' current workers:
On the question of whether they give the money back to workers in higher wages, my guess is that very little will be passed on. The tax cut is temporary. Few employers are going to want to give higher wages in 2012 and then cut wages back to their prior level when the tax ends at the end of the year.
It's too temporary to meaningfully affect wages.
Now, the analogy between the employer-side payroll tax cut and the corporate tax repatriation holiday isn't perfect. For one thing, there is a version of the employer-side payroll tax cut that rewards employers more for actually hiring people. So it's at least a little better than the corporate tax repatriation holiday.
But the bottom line remains: uncertain employment gains from an employer-side payroll tax cut; certain damage to the integrity of Social Security, at a time when the program is already under major attack. That is not a good trade-off.
Views expressed are those of the author, and in no way reflect the views of Social Security Works or the Strengthen Social Security Campaign.
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