WHY DON'T ELIGIBLE FIRMS CLAIM HIRING SUBSIDIES? THE ROLE OF JOB DURATION

Abstract

I. INTRODUCTION For over 30 yr, the U.S. government has encouraged the hiring of disadvantaged workers by allowing firms with qualified workers to claim federal tax credits. The Work Opportunity Tax Credit (WOTC) and Welfare-to-Work Tax Credit (WtW) are available to firms that hire certain workers from a number of target groups, such as welfare recipients, young food stamp recipients, young workers from economically depressed areas, and ex-felons. Despite substantial labor market participation by these groups, only a small percentage of firms claim the subsidies for which they qualify. For example, Wisconsin microdata suggest that employers left an estimated $8 million unclaimed for qualified welfare and food stamp recipients in 2001; in the same year, employers claimed less than $2 million for workers in these target groups. Because Wisconsin only accounts for about 2% of the U.S. population (and 2% of all WOTC/WtW certifications), unclaimed benefits nationwide are likely to be worth over $400 million per year. Moreover, low participation in employer subsidy programs is not a new phenomenon but has persisted for decades in a variety of similar programs. Why do firms leave these subsidies unclaimed? Possible explanations for this puzzle include lack of information, discomfort with involvement in government programs, or low benefits from participation relative to administrative costs. In this study, I examine the merits of the last explanation. In particular, I investigate the potential role of worker requirements, which tightly link subsidy rates to the job duration of qualified employees. Such requirements have been a standard feature of targeted employer tax credit programs since the 1970s. In the period I study (1999-2002), a firm qualifies for the WOTC only if an eligible worker remains employed for at least 120 h, and the subsidy rate increases if the worker exceeds 400 h. The WtW credit requires a minimum of 400 h of work; however, workers in this category can qualify for the WOTC if they do not meet this hours requirement. A firm must apply for the tax credits at the time it hires a qualified worker, even though the firm will only be permitted to claim a subsidy if the worker's hours exceed the threshold. This combination of up-front costs and uncertain benefits might discourage some firms from participating. Understanding the potential role of hours requirements in the participation decision may provide needed insight into firms' continually low interest in employer subsidies. In this article, I examine the relationship between a firm's WOTC/WtW participation and the distribution of its eligible workers' job durations, which is a key determinant of potential benefits. I use a unique set of Wisconsin administrative data, which links the state's WOTC/WtW job records (containing hourly wage data) to their corresponding unemployment insurance records (containing total earnings data). This allows me to conduct the first examination, to my knowledge, of the distribution of job durations (in hours) for subsidy-certified workers. (1) I then compare this distribution with an estimate of the hours distribution for other WOTC/WtW-eligible workers whose employers did not apply for the credits. A reasonable explanation for these firms' nonparticipation may be that they would have gained little from the subsidy program. If firms form expectations based on their typical hours distribution, then I expect to see higher participation among firms with stronger distributions, that is, with more workers in the higher subsidy brackets. I estimate the average fixed cost of firm participation in WOTC and then, using a probit model in which I control for relevant covariates, I analyze the relationship between firms' worker-hour distributions and their participation in the WOTC/WtW. Although this relationship is interesting, it does not necessarily imply a causal effect of hours on participation if, as theory would predict, participating firms maximize WOTC/WtW benefits by intentionally increasing workers' job duration (after the participation decision has already been made). …