Policies That Discourage Full-Time Work

January 9, 2014

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, says Casey B. Mulligan, an economics professor at the University of Chicago.

  • 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.

Other reasons for part-time work include:

  • 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.
  • 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.

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

  • Between 2007 and 2012, there had been little net change in the tax rate on full-time work because the 2011-2012 payroll tax holiday largely offset the increases from SNAP and mortgage modification.
  • Mulligan thinks 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.

Source: Casey B. Mulligan, "Policies That Discourage Full-Time Work," New York Times, January 8, 2014.

 

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