Baby chicks seem to like to test the tastiness of everything they come in contact with until they get the hang of eating real food. The paper towel keeps them from eating wood chips and ruining their innards.
The paper towels also give them a textured surface to get a grip on when they are just standing and walking. If you put chicks on something too slippery you will find that you develop spraddle leg that often can't be fixed. We don't use newspaper or other paper for that reason. It is too slick. Some people do use sand.
I had used paper towels for the first week, then after that I put newspaper topped with pine shavings, figuring by then they'd be fine. Went to check on them one morning and at least half were walking funny and starting to get spraddle leg. I quickly put paper towels over the shavings and by that afternoon all but one were fine. It took several weeks until the one little one was back to normal. Learned the hard way
I have a tray in my wire brooder with pine shaving in it. I did put paper towels in it but not any more. I did sprinkle a little bit of their feed to give them something to pick at. So far so good. I haven't had any problems. I did the same for my big girls when they were chicks.
I place the paper towels over the pine shavings for all the reasons everyone else has stated plus one more. I feel the younger they are the more easily they can catch something (like coccidiosis). So I change the paper towels about three times a day for the first week, then about twice a day the second, then the third they are just on pine shavings. The paper towels make clean up super easy and fast, just pull them out and put more in, no need to change the shavings.