In defense of wage subsidies for low-income workers

AEI’s Mike Strain has written favorably about expanding the Earned Income Tax Credit, as well as the idea of new wage subsidy for the long-term unemployed to make them more employable and provide them with a decent paycheck. The latter might be paired with a lower minimum wage for that group. For example: a $4 an hour minimum wage and a $4 wage subsidy. He suggests paying for it by taking some of the dough the federal government spends on the highest-earning households — like through the mortgage interest deduction — and diverting it to this program. Strain: “Society must have as a goal that no one who works full time and heads a household lives in poverty.” Agreed.

Now over at the Manhattan Institute, Oren Cass outlines his idea for an even larger wage subsidy. As he summarizes:

A wage subsidy adds dollars-per-hour to the worker’s wage, on a sliding scale that pays the highest subsidy for the lowest wage and phases out to no subsidy as the wage increases. A worker earning $8 per hour might, for instance, receive an additional $2 per hour in his paycheck. And he would receive that for every hour worked, no matter how many hours he worked or how much he eventually earned. For him, the policy appears like the minimum wage has been raised to $10 per hour. But for his employer and co-workers and customers the cost is still $8 per hour. Other workers unwilling to take a job at $8 per hour but willing to at $10 per hour would join the labor force as well.

But wait a second? Why is this an issue for government? Cass:

Consider the median income of working men over age 25, with only a high school diploma, in relation to the poverty line for a family of four. In 1973, that median income would bring a family to more than 200 percent of the poverty line; but in 2013, to only 131 percent. For high school drop-outs, the figures are 171 percent in 1973 and 90 percent in 2013 (Figure 2). In other words, a working high school graduate in 2013 was in worse position to support his family than was a high school drop-out in the 1970s. And a working high school drop-out in 2013 was likely mired in poverty despite his employment. …

One response to these challenges is simply to accept them: Living standards have improved across the income distribution. Efforts to distort the market wage are inherently inefficient. Social programs exist precisely to help those unable to earn a sufficient income. And investment in education will improve skill levels and productivity over time. Such acceptance is a mistake because it leaves unused the most effective weapon in the antipoverty arsenal. Low wages do not only—or even primarily—produce poverty through the obvious and static mechanism that earning less money leads one to have less money. Of greater concern are the dynamic ways in which low wages grease the flywheel of long-term and intergenerational poverty. Low wages leave individuals who work with insufficient resources to invest in their future and that of their children. Low wages discourage entry into the workforce and the formation of stable families

In theory, wage supports thus offer a unique opportunity to break America’s negative cycle of poverty, family and community breakdown, and low human-capital development. Transferring resources directly to the working poor, thereby encouraging more poor people to work, is an intervention that better leverages what government can do effectively. Social programs ask government to build strong families and communities in destitute neighborhoods.