Income Support Programs and Low-Wage Work

LOS ANGELES, CA - FEBRUARY 19: Workers retrieve shopping carts at the Crenshaw Plaza parking lot near the Wal-Mart on Februar
LOS ANGELES, CA - FEBRUARY 19: Workers retrieve shopping carts at the Crenshaw Plaza parking lot near the Wal-Mart on February 19, 2015 in Los Angeles, California. Wal-Mart Stores Inc. announced today that it was increasing employee's wages in the U.S. to at least $9 an hour, $1.75 above the federal minimum wage, to take affect in April. (Photo by Bob Chamberlin/Los Angeles Times via Getty Images)

"The starting salary for an employee at Walmart is below the poverty line. Now, the American government subsidizes Walmart to the tune of 7.8 billion dollars a year, by issuing food stamps to over one in ten of its workers. But here's the scary part. Fifteen percent of all food stamps are actually used at Walmart. Meaning Walmart gets to double dip into the federal government's coffers." -- Heather Dunbar, House of Cards

Heather Dunbar may be fictional, but there are tons of real-world equivalents. House of Representatives Democrats have argued that Walmart wages are so low that it costs taxpayers as much as $900,000 at just one Walmart Supercenter in Wisconsin. Daily Kos has argued that "Wal-Mart workers' reliance on public assistance due to substandard wages and benefits has become a form of indirect public subsidy to the company. In effect, Wal-Mart is shifting part of its labor costs onto the public." Amy Traub of Demos insists "There is no doubt that food stamps (and a host of other public subsidies from Medicaid to home heating assistance to the Earned Income Tax Credit and beyond) reduce Walmart's employment costs substantially."

Obviously, the argument is quite real and oft-repeated. It is also 1000 percent wrong.

The reality is that low-wage employers compete with income support programs for the time of workers. If those programs become more generous, the value of not working increases and employers have to raise wages to attract workers. Far from subsidizing the employers of low-wage workers, taxpayer provided support raises their cost of doing business. In the process, the income support programs may contribute to pricing low-skilled workers out of jobs and increasing the incentive to substitute modernization and technologies.

The economics of the impact of more generous income support on wages and low-wage work are quite simple. (However, I do make them relatively complicated here.) Other things being the same, more generous programs will lure some workers or, for others, some part of their current hours of work out of the employment market. This is an entirely understandable and predictable response to having more money. At the same time, restaurants, drinking establishments, retail stores and other low-wage employers will find themselves competing for shrunken pool of workers and forced to raise pay to get the employees needed to satisfy their customers.

Is this, however, a big deal or some minuscule economic novelty? The research literature is not definitive, but should give even the most dedicated progressive some cause for concern. Put bluntly, every 10 percent expansion of income support might raise wages as much as 2 percent. Doesn't sound too bad until you reflect on the fact that income support net spending -- excluding the Earned Income Tax Credit, which has a clear positive impact on labor supply -- has expanded by roughly 50 percent since 2003. That would mean that the expansion has driven up wages by nearly 10 percent.

In the United States, the key difference between being in poverty and escaping poverty is work. And there is no barrier to work more significant than an inflated wage that turns a prospective hire into economic red ink. Far from reducing the red ink, the welfare and other income support has clearly contributed to it. Getting the size of support programs right requires discarding fuzzy thinking and focusing on the both the benefits and the costs of making work more expensive.