Unwise Federal Demands Cause Major Loss of Jobs
Employers must pay for worker benefits unfairly imposed by Washington
MORE than one million jobs, on net, disappeared during the Bush recession. And Bill Clinton, despite his campaign emphasis on job creation, seems unprepared to deal with the cause of the economic slowdown.
The real problem is not, as President Clinton seems to think, inadequate taxation; it is the government's de facto war on employment. Despite popular perceptions, federal regulation, spending, and taxes all jumped during President Bush's administration and seem likely to grow faster over the next four years. The surprise, then, is not that so many jobs have been lost, but that only a million vanished.
Job-destroying federal laws come in many forms. An especially important factor in the 1.14 million drop in teen employment after January 1990 was Congress's 1989 approval of a multiyear increase in the minimum wage, which hit $4.25 an hour last year. The minimum wage, which prices old as well as young people out of work, also disproportionately hurts the restaurant industry. Although many waiters earn more from tips than the minimum wage, the government only allows employers to count gratuities up to hal f of the minimum wage. A windfall for employees, the extra $2.23 that firms must pay discourages job creation. In an attempt to save on labor costs, for instance, some restaurants are moving to self-service and automation.
On top of the minimum wage comes the Federal Insurance Contributions Act (FICA), the Social Security tax. Since workers' tips do not come from employers, firms should not be expected to pay FICA on these earnings, which should instead be the employees' responsibility, as it is for the self-employed. Yet in 1987 a revenue-hungry Congress required employers of not only waiters, but also cab drivers and other workers, to pay Social Security taxes on their employees' tips.
While companies in most industries are able to set the overall cost of hiring their workers - formal salary, fringe benefits, and ancillary expenses like Social Security - firms whose employees get tips have to pay taxes on de facto wages paid by other people.
The money to pay FICA doesn't materialize out of thin air. To the contrary, the tax imposes yet another penalty on employment, hurting not only companies but also potential workers. All told, the Employment Policies Institute figures that Congress's money-grab has eliminated about 72,000 jobs - 39,000 in the restaurant industry alone.
With deficit reduction today's watchword, Congress has tended to think more about the money it is collecting than the jobs Americans are losing. But because putting people out of work reduces the amount of taxes they pay, the measure is fiscally short-sighted as well. Economists Richard Vedder and Lowell Gallaway estimate that the federal treasury is receiving only about $5,000 for each lost job.
Congress's unintended attack on bars and restaurants is particularly myopic because "hospitality" is one of America's growth industries, providing significant upward mobility for its labor force. Most bars and restaurants are small - 80 percent have annual sales of less than $500,000 - and the rate of employment growth in such establishments greatly exceeded that of the rest of the economy during the 1970s and 1980s. At the same time, tip income grew faster than wages, making Congress's action particular ly onerous for these businesses. Moreover, the industry is not a dead end, as is commonly thought.
A recent survey of hospitality employees found that 80 percent of them believed their work had helped prepare them for future employment opportunities. In fact, these service jobs improved workers' skills in 11 areas cited as critical by the Labor Department, such as working with people, learning responsibility, and problem-solving.
But the FICA tax also illustrates a broader problem: Congress's tendency to kill the golden goose. Legislators have long targeted one business or another for financial plucking, with consistently disastrous results. The so-called luxury tax, for instance, shot at yacht buyers but hit boat builders and sellers, putting an estimated 19,000 people out of work. Moreover, Washington's continuing actions forcing up employer costs through broader measures, such as a variety of mandated benefits, have also slowe d the American job machine.
Sens. John Breaux (D) of Louisiana and Byron Dorgan (D) of North Dakota have introduced legislation to repeal the FICA tax on tipped income. Although the budget package included a last-minute, partial tax credit for Social Security payments by restaurants, the administration and Congress should support full rescission.
Putting tens of thousands of people back to work would be a worthwhile goal any time and would help fulfill the administration's promise of an employment-rich recovery. But even more important would be recognizing that business people will create more jobs only when government stops penalizing them for doing so.