wage subsidies

Bob McGrew explains a fascinating solution to poverty that appeals to both my social liberalism and my fiscal conservatism - wage subsidies:

Suppose you want every worker to be paid at least $10/hour. A minimum wage would just destroy jobs for people with productivity less than $10/hour. Wage subsidies won't, because the government pays the difference between the market wage and $10/hour.

The idea of a wage subsidy is that if an employer pays a worker a $5/hour salary, the government will give that employer a $5/hour subsidy which it would then pass on to the worker. The worker ends up making $10/hour, but the employer pays only $5/hour, so that it's still worth it to the employer to hire the worker and the job is not destroyed. The wage subsidies are phased out on a sliding scale, so that there's no cut-off effects.

In other words, this seems like a way to implement the goal of living-wage campaigns, without destroying jobs or economic efficiency. And, in a way, it's fair: if there are social benefits from higher wages, it makes sense that society as a whole should have to pay them (through taxes), rather than private companies. This is the best way to help the poor that I have heard of yet. It provides a basic minimum while encouraging work (which is the only way to end poverty) and making crime not pay.

The counterargument to the idea is that employers could simply drop the wages they pay to their workers by the amount of the subsidy, essentially turning it into an employer subsidy. Bob addresses this:

Basically, the market will bid up the worker's wage to whatever an employer can gain by employing him. If a worker's productivity is $10/hour and his wage subsidy at $10/hour is $3, an employer can get $13/hour from employing him. So the market will bid his wages up to $13/hour and the employers won't benefit from the subsidies - it will all be passed through to the worker.

This sounds airtight, but IANAE (I am Not an Economist). I'm going to see if I can solicit some hard-nosed conservative ones to comment though...

As Bob notes, the plan will have significant cost. But the point here is that wage subsidies rae designed to supplant standard welfare payments and the Earned Income Tax Credit. Much of the cost could theoretically be covered by reducing (but not eliminating!) these as well as housing assistance, food stamps, etc.

The main reason this idea has merit is because it encourages both a work-based solution to poverty as well as a decent living wage. The idea isn't to argue about what the living wage should be, but rather to raise the overall standard of living in a more effecient and long-term beneficial way than simply spending money on welfare payments.

UPDATE: heavy discussion over at the Dean Blog on the topic - and Steve Verdon also chimes in with a critique that wage subsidies can only work if welfare is dismantled, and thinks that is politically unlikely. I agree that eradicating the welfare system is a bit ambitious, but there should be some way to incentivize people to move towards one over the other.

No comments: