When political tribes on opposite sides of the ideological chasm agree on an economic policy, we can be sure it’s an absolute stinker. So it is with Fox News’ Tucker Carlson – think Peter Hitchens without the lightness of touch – who has found himself in a rare moment of agreement with Bernie Sanders.
Both Carlson and Sanders think it’s just terrible that big companies pay their staff so little they are forced to claim welfare on top of their wages, meaning the likes of Amazon are mooching off the taxpayers. In their mind this means the vast fortunes of Jeff Bezos and his ilk are being subsidised by Average Joe taxpayers, obviously.
Except that’s not the effect of the welfare state, not at all. Instead, with a minor exception, the effect of handing out money to people is to raise wages. To put it more formally, the welfare state increases the reservation wage, increases the amount people have to pay to tempt people to come and trade their labour.
Bernie has a bad idea to deal with all of this, of course. Companies should face a tax bill equal to the amount that their workers gain in welfare. A cashier gains $200 in food stamps to feed her children, Walmart pays another $200 in tax. A warehouse inmate gets Medicaid, Jeff Bezos’ company gets the bill. As ever, Bernie has not thought through the effects of his proposals. For the American welfare state – as with the British in a milder form – pays benefits based upon household circumstances.
A single adult with no dependents gets very little. The single parent with a disabled child among the extensive brood gets quite a lot. Arguably this is as it should be, the children didn’t ask to be born into poverty so there’s something of an injunction for the state to alleviate it. But note what happens if we now charge employers for those welfare payments.
Yes, that’s right, our single adult costs $7.25 an hour to employ, the single mother $7.25 plus $600 a month in food stamps (a likely enough allowance). Who gets to be at the back of the line when the jobs are handed out? It’s not the one costing the employer less, is it?
Equally, here in the UK, which employer would hire someone gaining £1,000 a month in housing benefit if there was a teenager living with his Mum? The very basis of Sanders’ idea is that all those society thinks are worthy of a top-up because of their circumstances would be last in line to gain any market income at all. That’s not how to run a poverty alleviation scheme, is it?
But over and above getting the practical effects wrong, the thought isn’t even right in theory. The existence of welfare payments raises the amount an employer must pay, rather than lowering it.
Walk through reality for a moment. If the unemployed got nothing at all, they would presumably go to work for a pittance just to keep food on the table. If instead unemployment is seen as a possibly temporary disaster that could befall us all, what should a government be willing to pay out in benefit to jobseekers? Clearly the payment for turning up to work must be higher than the amount that can be gained by not working. The reservation wage is the amount that we require before we’ll get off the couch – obviously, the higher the welfare payments, the higher the reservation wage.
The fact is that the existence of the welfare state pushes up wages. This is true of any payments that come from simply having a low income, whether one is in work or not. It’s also largely true of in-work only benefits.
In theory something like working tax credits, the Earned Income Tax Credit, could lower wages. You only get these if you are working, so some amount of it is captured by employers. The best estimates are that about 70 per cent of such payments leads to higher incomes for the worker, the other 30 per cent or so are a subsidy to those wages. That is, the employer gains some 30 per cent of the sum paid in having to pay lower wages.
This could be thought of as the very terror, but then the justification for these specific payments is to subsidise the employment of low-skilled labour. “Subsidy provides subsidy” isn’t all that shocking, after all.
Finally we should look at how much we pay in these benefits and welfare. The vast majority of every system is top-ups to low incomes not contingent upon being in work. So the effect of the system as a whole is to raise those reservation wages, not subsidise employers.
The underlying complaint from both Carlson and Sanders, that welfare subsidises employers is wrong, the system raises the wages they must pay. To then go on to insist that employers should be taxed on the welfare their employees receive is to double down into stupidity. But then, you know, as we’ve said, when there’s this sort of agreement across the political divide we know the idea’s a right stinker.