Payroll taxes reduce wages by about 2.5 percent and employment by between two and 4.8 percent. That’s just one of the findings reported in Payroll Taxes: Killers of jobs, Killers of wages, by Morley Gunderson, the CIBC Chair on Youth Employment at the University of Toronto and a Fellow of the Royal Society of Canada. Professor Gunderson examines the Canadian research and shows that it is actually lower wage earners who pay the cost of payroll taxes.

“Much of the burden of payroll taxes, evidence suggests approximately 80 percent, is ultimately shifted to labour in the form of lower wages even if it initially is ‘paid for’ by employers,” he writes. “Thus, the appeal of taxing rich corporations through a payroll tax is based largely on a false image.”

Payroll Taxes, the second in a four part Labour Market Commentary Series published this month by AIMS, also shows how caps on payroll taxes reduce employment opportunities.

Gunderson explains, as an example, the cap on EI payments unintentionally creates an incentive for employers to have their current employees work long hours (since they are likely at the cap and no further payroll taxes need be paid for them), rather than hire new workers and pay their higher payroll taxes until they reach the cap (Reid 1986).

“This can lead to long hours and “overworking” of incumbent workers who already tend to suffer from the “time crunch” associated with balancing work and family,” he says. “It can also foster the unemployment of more marginalized groups that are facing difficulties being hired because the payroll tax would apply to them.”

Gunderson says the most important issue is to ensure that the programs payroll taxes finance are designed, implemented and administered efficiently. He also suggests there be a review of the limits on payroll taxes such as EI, switch to employer experience-rating to set workers compensation and EI premiums, and re-examine EI’s regionally-extended benefits because they slowly erode the ability of local economies to create viable jobs.

The other topics covered in AIMS Labour Market Commentary Series are Minimum Wages, Mandatory Retirement, and Replacement Workers.

To read the complete Commentary on Payroll Taxes, click here.

To read the Commentary on Minimum Wages,

click here.