October 13, 2016

Should Welfare Really Pay Living Wage?

Three years ago Michael Tanner and Charles Hughes at the Cato Institute published an excellent update of a 1995 study of the actual value of welfare in America. Tanner and Hughes went to great length to explain how a person could live on the many welfare programs that the federal government and the states offer for people who are defined as living in deprivation one way or the other.

Among their findings (p. 3):

  • Welfare pays more than a minimum wage job in 35 states, even when the worker's Earned Income Tax Credit is accounted for;
  • In a dozen states, a person loses money on taking a job that pays him as much as he got living on welfare; 
  • In 13 states a person can make the equivalent of $15/hour or more on welfare.

The first point is quite staggering. Most people on welfare lack the skills to get jobs paying significantly more than minimum wage, which effectively means that generous welfare programs trap people in government dependency. 

What is the solution to this? As a libertarian my answer is: Welfare Reform 2.0, the long-term aim of which should be the complete privatization of all welfare programs. It is doable, as I explained four years ago in a collection of papers called Ending the Welfare State: A Path to Limited Government That Won't Leave the Poor Behind.

While likeminded people ponder the possibility of actually expanding economic freedom into areas currently monopolized by government, the left has concocted their own answers to the work vs. welfare problem. One of them is called the "living wage", an idea that has been around in various forms since the 19th century. In the past two decades it has gained traction here in the United States, in part because of studies like A History of the Living Wage Concept by Robert Shelburne. Another force for the advancement of the living-wage concept is the Alliance for a Just Society which has been advocating the issue since at least 1999. They published a comprehensive living-wage report in 2015 where they translated the idea of a living wage into an hourly earning.

Before we look at their numbers and - you guessed it - compare them to the Tanner-Hughes numbers on the value of welfare, let us first note that the concept of a living wage is nothing more than another way to expand government entitlements. The original concept of poverty, which used to be the target of deprivation-alleviating welfare programs, is but a distant spot in the rearview mirror of the egalitarian movement. They are pushing hard to expand the population that is permanently eligible for all sorts of entitlements. One of their tools is the "living wage" standard of living which they are trying to establish as some sort of inadequate way of life with only one solution: more tax money for more entitlements.  

The irony of the living-wage movement is that in many states, government already provides for the standard of living that the Alliance for a Just Society defines as the equivalent of living-wage earnings. The following chart compares the Tanner-Hughes hourly earnings equivalents of welfare to the hourly earnings that are stipulated as a "living wage". The blue columns illustrate the ratio of the welfare hourly wage to the living-wage equivalent. For example, in New York welfare pays the equivalent of an hourly wage of $22.07*, while the living wage is determined to be $19.90. This means that welfare pays 111 percent of the hourly living wage:

In ten states and the District of Columbia, welfare pays more than the living wage:

District of Columbia 143.7%
Hawaii 142.7%
Massachusetts 130.1%
Rhode Island 129.9%
Vermont 124.8%
Connecticut 117.7%
New Hampshire 116.5%
Wyoming 112.0%
New Jersey 111.0%
10  New York 110.9%
11  Oregon 108.3%

In another nine states welfare covers at least 90 percent of the living wage:

12  North Dakota 99.6%
13  California 96.8%
14  Maryland 95.1%
15  Montana 94.7%
16  South Dakota 93.8%
17  New Mexico 92.7%
18  Minnesota 92.3%
19  Washington 91.3%
20  Ohio 91.3%

In other words, it looks like the American welfare state already offers millions of people the opportunity of a living-wage standard, without even demanding that they work for the money. 
*) Methodological note: The Tanner-Hughes numbers are from 2013, while the living-wage numbers from the Alliance for a Just Society are from 2015. To account for the time discrepancy, the Tanner-Hughes numbers have been updated to 2015 using the GDP quantity index from the Bureau of Economic Analysis

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