Courtesy of The Other 98%, with over 93,000 likes and 82,000 shares. This meme conveys a common theme; that businesses who employ low wage workers benefit from welfare programs, such as food stamps. On the surface, this appears to make sense. The belief is that employers “get away with” paying lower wages because the government picks up the tab for their poor employees. Absent government intervention, they would be forced to pay higher, “living wages” right?
Actually, it’s the opposite. When we take a deeper economic view of the issue, we see that welfare programs actually decrease labor supply, which puts upward pressure on labor prices (i.e. higher wages). In other words, employers would prefer less welfare programs, at least as it relates to hiring low wage employees. If this seems counterintuitive, take the time to break it down. For a more technical analysis, see Professor Bryan Caplan of George Mason University explain the issue here and here. For a layman’s explanation, see below.
A Quick Caveat
For this analysis, we need to first mention that all welfare programs aren’t created equal, and have different effects on the economy and labor market. There are differences between programs like food stamps, which give benefits for no work (and often reduce workers’ benefits the more they earn), and programs like the Earned Income Tax Credit, which requires its recipients to work. Since this meme is clearly referring to the former, we’ll primarily look at the effects of programs like food stamps on workers and employers.
Lawn Mowing and Allowances
Economists would use terms like marginal benefit and marginal cost to explain how welfare would impact the labor market. To illustrate these concepts, let’s think of a kid with an allowance. If they get $20/week from their parents, how will this affect their willingness to mow the neighbor’s lawn for $10? It would reduce it. With the allowance, they are now able to buy some material things they want, plus have time to play, which they prefer versus work. Absent any allowance, they would be forced to mow lawns to get the newest video game, or see the latest movie with their friends. With an allowance, a kid still might want to mow lawns if their allowance was insufficient to buy a new bike, for instance, but it will generally decrease the desire to work. In essence, a $20 allowance means they already have “2 lawns” mowed under their belts, and the law of diminishing returns will always make it less desirable to mow that 3rd lawn versus the 1st and 2nd one.
Now, let’s think about a neighborhood where every kid received an allowance. What would this do to the lawn mowing labor market? Clearly, there would be fewer willing to work at lower rates, which would push the price of labor up. If the price was previously $10 for lawn mowing, now it might take $15 or $20 to pique the interest of neighborhood kids to put down their video game for a couple hours and mow a lawn. If you were a homeowner who wanted to pay the least amount for lawn service, you would prefer to live on a block with kids receiving no allowance.
Welfare in the Adult Labor Market
The dynamics change a bit when examining adults, and their motivations for money are far less trivial, but the principles of economics remain the same. The more you pay people not to work, the more the marginal benefit of working falls, and leisure rises. As welfare benefits go up, the supply of low-skilled labor will decrease, which will tend to put upward pressure on wages. This point crystallizes if we imagine an extremely generous welfare system. Imagine if people were given $100,000/year in benefits, there would be little incentive for anyone to put up with the drudgery and hassles of a minimum wage job just to make a little more. The effect is obviously less as you reduce welfare benefits, but it still remains due to the laws of economics.
Just like an old miser would prefer a neighborhood where no kids got an allowance so he could save a buck on lawn mowing, an employer trying to save on labor costs would prefer an environment with no welfare payments, and an increased supply of low-skilled labor. While “leaching” is a loaded term that this meme uses, it’s fair to say that the food stamp recipients are the ones who are primarily benefiting from the program. They get a benefit without working. To say the employer is benefiting, when it comes to paying workers at least, is wrong.
It’s true that certain businesses might benefit from welfare beneficiaries using food stamps at their stores, but this is a separate issue, and many employers of low wage employees get zero income from food stamps.
“Pro-Work” Welfare Programs
The previous analysis was considering welfare programs which pay people for no work, like food stamps and Section 8 Housing. If we instead consider programs that reward work, the results change. Let’s look at a program like the Earned Income Tax Credit, which only kicks in if one works. If we go back to our lawn mowing example, this would be like telling a kid they only get their allowance if they mow some lawns. In effect, this would increase the desire to work. Sure, the kid still has a desire for leisure, but is now giving up a much larger marginal benefit if they don’t work. If every family in the neighborhood adopted this policy, there would be more kids willing to mow lawns, and the miser on the block would benefit.
Pro-work welfare programs like this have the effect of increasing the supply of labor, which would tend to put downward pressure on labor prices, and be beneficial to employers looking to lower costs. However, it would also improve productivity and economic output in the economy, and many consider it a much more positive version of welfare, as it still helps the low income worker while encouraging employment and the development of job skills.
This meme’s claim that employers who hire low wage workers are “leaching” off the government is wrong. It’s the recipient of the food stamps who gets the primary benefit, while the economic effect is actually to raise the employer’s labor cost for low-skilled workers. If an employer was only concerned with paying less wages, and educated in economics, they would actually oppose welfare programs, with the exception of those like the Earned Income Tax Credit.