Americans are a generous and kind-hearted people. We are more than willing to go to bat for the less fortunate among us. The question is how to do it effectively. A post six months ago, “A balanced and Sensible Anti-Poverty Program,” laid out four principles for an effective anti-poverty program from Robert Doar of the American Enterprise Institute. They are:
work requirements for welfare recipients
work incentives such as the Earned Income Tax Credit
fostering married, two-parent families
business growth and investment to create more jobs
There is currently much interest in , and public support for, raising the minimum wage at both the state and national levels. This is viewed by the general public as an effective way of addressing poverty. However a new report from Mr. Doar makes clear that simply holding a real job, even with low pay, is what makes the biggest difference as to whether or not someone is able to rise above poverty. Even though the overall poverty rate in the U.S. is about 14%, the poverty rate for fulltime workers is only 3% and even for part-time workers it is just 7% (see the above chart). Furthermore, as detailed in the second above chart, the total income (including selected benefits) of a low-income earner, at $8/hour, with two dependent children, and working fulltime, is $30,204, well above the poverty line.
Conclusion: yes, poor people need public assistance but it is equally important to work with them to find and hold a job, regardless of hourly wage. Not only will this meet their basic material needs, it will also put them on track to become self-supporting, productive citizens.
In my last post I endorsed raising Nebraska’s minimum wage from $7.25/hour to $9.00/hour because Nebraska’s unemployment rate is only 3.6% and so a minimum wage boost is unlikely to put very many people out of work. I also stated opposition to President Obama’s proposal for a raise in the national minimum wage to $10.10/hour because it would likely put at least 500,000 people out of work. A recent article in National Affairs by Charles Lane, “A Grand Bargain on the Minimum Wage,”suggests an approach to end a perennial controversy over how to set a minimum wage at the national level. It is based on the following observations:
Increasing the minimum wage has broad public support. A recent Gallop poll found that 76% of Americans support an increase to $9.00/hour.
However, just 4% of minimum-wage workers are single parents. Only 11.3% of workers who would benefit from an increase in the minimum wage come from poor households. The majority of minimum-wage workers do not live in poverty.
A more efficient, better targeted support program for the working poor is the Earned Income Tax Credit which provides a refundable tax credit as high as $6,143 for an adult worker with three children.
Since 1959 the average income for a full time worker earning the minimum wage has equaled two-thirds of the poverty line for a family of four. The current poverty line for such a family is $23,850. This equates to a minimum wage set at $8.00/hour.
Another option would be to set the minimum wage at 45% of today’s average private sector wage of $20/hour. This would make it $9.00/hour. The CBO has estimated that a $9.00/hour minimum wage would put “only” 100,000 people out of work.
Once a new minimum wage level is determined, it should be automatically adjusted for inflation using the Consumer Price Index.
The EITC is not cheap; it currently gives $63 billion in benefits to 27 million workers. However the EITC’s improper-payments rate regularly exceeds 20% per year.
An expansion of the EITC to single, childless workers could be paid for by tightening up EITC’s payment methods.
All of these considerations suggest a way forward to end a long-standing political controversy in a productive manner. The national minimum wage should be raised to somewhere between $8.00 and $9.00/hour and then indexed to the CPI. At the same time the EITC should be tightened up and expanded to single, childless adults. Such a program combines fairness with a strong work incentive and should have broad appeal.
Work requirements as a condition of public assistance. The work first approach has been shown to have better outcomes with regard to attachment to the labor force than even approaches which focus on training and education.
Robust work supports for those who are working at low wages. The Earned Income Tax Credit accomplishes this and should be extended to childless adults.
Business growth and investment. Policies that raise the cost of doing business and deter growth do little to create what the poor need most: jobs.
Foster married, two-parent families. We need to mitigate marriage penalties in public assistance programs and we need to be honest about the consequences for children of single parenthood.
Mr. Doar points out that 10.2 million American’s are unemployed at the present time, 3.6 million have been jobless for more than 27 weeks, 7.3 million are involuntarily working part-time and 837,000 workers are so discouraged that they have stopped looking for work. Labor force participation has dropped from over 66% in 2007 to 63% today while the poverty rate has risen from 12.5% to 15%. Raising the minimum wage will not help the job prospects of most poor Americans. Only 11.3% of individuals who would benefit from raising the minimum wage are living below the poverty line. The Congressional Budget Office estimates that raising the minimum wage to $10.10 per hour would lead to 500,000 people losing their jobs. CBO also estimates that the Affordable Care Act will reduce full-time employment by 2.3 million by 2021. Given the strong anti-correlation (see the above chart) between labor participation and poverty, this means that the poverty rate may go higher yet.
The conclusion to draw from this excellent poverty synopsis (with lots of references) is that there are intelligent and effective ways to fight poverty and also much poorer ways to try to do it. Good intentions are not enough!
On June 18, 2013, Lawrence Mead, Department of Politics and Public Policy, New York University, testified before Congress, “Making Welfare Work”, that even as the number of Americans receiving welfare has dramatically increased in recent years, welfare programs are failing to provide sufficiently strong incentives for the recipients to find work. This has contributed to the fact that “the share of our population that is employed has recently fallen sharply compared to several European countries” such as Germany, the Netherlands and the United Kingdom.
Mr. Mead shows that there are three main reasons for this: “(1) work tests in the major income programs are still limited, (2) we have neglected the problem of poor men, and (3) the disability programs are diverting too many Americans from the work force entirely”. He points out that the Welfare Reform Act of 1996 required that the Temporary Assistance for Needy Families (TANF) program put 50% of their cases in rigorous “work activities” by 2002. This led to a dramatic reduction of the AFDC/TANF rolls by more than two-thirds. But since then exemptions and waivers have sharply limited the specific work activity demands which mobilized welfare recipients to hold jobs.
Even with the currently high unemployment rate, there are plenty of low-paid, low-skilled jobs available, which are suitable for welfare recipients. After all, even a low-paid job may well provide the opportunity to learn skills as well as to develop better work habits. Congress clearly needs to strengthen work requirements for welfare. And the incentives need to be right so that these workers keep more pay than they give up in benefits.
Putting more welfare recipients back to work will not only help control the federal budget but also give our economy a boost by increasing the size of the workforce!