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Steps on an Upward Ladder

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Steps on an Upward Ladder

Why the government should subsidize low-wage work. April 20, 2015
Photo by Sergey Nivens

Last week, a University of California study reported that Washington spends more than $150 billion annually on means-tested benefits—principally food stamps, Medicaid, Temporary Assistance for Needy Families, and the Earned-Income Tax Credit—for low-income workers. The usual suspects on the left wasted no time attacking what the New York Times termed “in effect, a huge subsidy for employers of low-wage workers.” Such attacks misrepresent the actual role of the social safety net in the labor market and stigmatize low-wage work, which offers the best opportunity for struggling people to improve their circumstances.

In practice, means-tested government programs generally function more as an enormous tax on low-wage work than as a subsidy. Consider that in 2012, the Congressional Budget Office reported that a single parent with one child and no income would receive approximately $20,000 in such benefits, while a single parent earning $20,000 would receive less than $5,000—creating an effective tax rate of more than 75 percent on the working single parent. Our social programs are thus telling the employer and employee: for every $1 you pay or earn, we’re going to take away almost $1 of the worker’s benefits. That’s some “subsidy.” The result is the same as for any tax: you get less of the taxed thing—in this case, fewer poor Americans entering the workforce.

That’s regrettable, because not only do low-wage jobs replace at least some government spending with productive economic activity; they are also critical to disrupting cycles of poverty and providing economic opportunity. If we want to reinforce self-sufficiency as a societal value, if we account for the myriad effects the presence of a wage-earner can have on a family, and if we recognize that such jobs are, for many people, the first step on an economic ladder that can reach higher, then encouraging the creation of entry-level positions—even at very low wages—should be a priority. There is no reason why we can’t embrace low-wage jobs while also seeking to improve the condition of those working in them.

From this perspective, the idea of dramatically raising the minimum wage—a favorite proposal of today’s progressive Left—makes little sense. It attempts to solve the problems associated with low-wage jobs by pretending as if the alternative is a high-wage job, rather than no job. That approach might erase a troublesome statistical category, but it will mean many fewer of the positions that we should be trying to create as employers forgo hiring of workers whose productivity cannot support the higher wage. Nor, despite the lack of direct government spending required, is it free. Someone must pay the additional wages and that funding often comes from higher prices passed on to the customers of low-wage employers, who are themselves often low-income families.

By contrast, subsidizing low-wage work brings more such jobs into existence. It can leave each worker at least as well off as a higher minimum wage would. And the cost is borne disproportionately by the higher-income Americans whose taxes fund the government spending.

The one true subsidy we have today for low-income working Americans is rarely mentioned by critics of low-wage subsidies. The Earned Income Tax Credit is a direct subsidy for low-income families, paid only to those that earn income and designed to increase that income by up to almost 50 percent. It is also the rare anti-poverty program with broad bipartisan support, at least during those seasons of the year when rhetorical assaults on subsidies are not in fashion.

The University of California study sheds light on the struggles low-wage workers face—but its findings should encourage support for genuine low-wage subsidies that don’t penalize work. Instead of vilifying low-wage employers and low-wage subsidies, we should recognize the valuable role they play in our economy. The more we can reorient anti-poverty spending to function as a subsidy for low-wage work, the more effective it will be.

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