A 'corporate freeloader fee' to penalise companies that employ low-wage workers is a bad idea

  • Sen. Sherrod Brown has proposed a “corporate freeloader fee” on large companies that employ large numbers of low-paid workers.
  • The objectives of this policy can be better achieved through higher minimum wages.
  • Minimum wages and government benefits for the working poor can be designed to work together.
  • There’s no need for a special tax on low-wage work.

Benjy Sarlin of NBC News mentions a policy idea gaining traction among some Democrats: imposing a fee on companies that employ low-wage workers, ostensibly to defray the cost of providing food stamps and other benefits to these workers.

In the case of a bill from Sen. Sherrod Brown of Ohio, the fee (which he calls a “corporate freeloader fee”) would apply to large firms with employees who earn less than approximately $US13.13 per hour.

I get the impulse. The idea is that making sure employees have enough to live on is an employer’s responsibility (at least, if the employer is large), and so the employer should be taxed to pay for government-funded income support.

But it’s a bad approach to addressing a real problem.

There’s a better policy for raising low-paid workers’ wages: the minimum wage

From the firm’s perspective, a new fee on low-wage employment would have a very similar effect to a minimum wage increase: It would increase the firm’s cost to employ a low-skill worker. But unlike a minimum wage increase, it would direct employers’ additional spending on workers into government coffers instead of workers’ pockets.

If the labour market can support a minimum-wage increase with little-to-no disemployment effect, it is better just to raise the minimum wage.

If the labour market cannot support a minimum-wage increase with little-to-no disemployment effect (that is, if higher labour costs will lead firms to choose to employ a lot fewer low-skill workers), then the new fee will cause the same unemployment that a higher minimum wage would.

In such a case, the best way to increase low-skilled workers’ incomes without inducing unemployment would be to expand government programs like the Earned Income Tax Credit, or EITC, which provides a payment to low-paid workers that rises with their income.

Another plus of using the minimum wage and EITC as policy levers is they help workers even if they don’t work at large firms. A large-firm-only fee could even lead to more outsourcing: large companies could contract out low-skilled work to small firms that aren’t subject to fees like the one Brown proposes.

The earned income credit and minimum wage are policies that should work together

The EITC and minimum wage are often discussed as substitute policies to support low-skill workers, but there is a good reason to think about them as complements.

The EITC raises low-wage workers’ real hourly income, and may therefore make them willing to accept a lower wage than they otherwise would. Companies may take advantage of this by paying lower wages. For this reason, a part of the economic benefit of the EITC may accrue to firm owners instead of workers.

Where this is the case, a higher minimum wage can ensure that more of the economic benefits of the EITC go to workers. Even if the EITC makes workers willing to accept a wage below the floor, firms are not allowed to pay it.

Because labour market conditions vary greatly by region – in a metropolitan area where average wages are high, a $US15 minimum wage might have little effect on unemployment, while in areas with lower wages it could cause a significant increase in unemployment – there are good reasons to pair a national EITC with some state and local minimum wages above a federal floor. That would represent an effort to maximise the fraction of the benefits from income-support policies that accrue ultimately to the working poor without fostering unemployment.

A tax on companies with low-paid workers – which could make firms less inclined to create jobs for the working poor and would not necessarily raise their incomes – is a poorly-designed approach for this goal.

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