When Work Is Punished: The Ongoing Tragedy Of America's Welfare State

Tyler Durden's picture

Wage growth - or a persistent lack thereof - has become something of a hot topic in America. 

Thanks to the nationwide push for a higher pay floor (personified by mobs of angry fry cooks demanding $15/hour and Democrats on Capitol Hill who are pushing hard for "$12 by ‘20") and wage growth’s role as an input in Janet Yellen’s mental "liftoff" model, everyone from Main Street to Wall Street feels compelled to weigh in. 

The standard criticism of hiking the minimum wage is that forcing employers to pay more will simply result in layoffs and/or a reduced propensity to hire, but as we saw with Dan Price and Gravity Payments, there are a whole lot of other things that can go wrong. For instance, higher paid employees may not understand why everyone under them in the corporate structure suddenly makes more money and if people who are higher up on the corporate ladder don’t receive raises that keep the hierarchy proportional they may simply quit. 

But while politicians, pundits, and economists run in circles perpetuating a debate that’s better suited for an undergrad introductory economics course than it is for the national stage (it’s really quite simple, as New York Burger King franchisee David Sutz made clear when he told CBS that "businesses are not going to pay $15 dollars an hour [because] the economics don't work in this industry [given that] there is a limit to what you're going to pay for a hamburger"), there’s a far more troubling situation unfolding behind the scenes and it harkens back to an issue we discussed at length almost three years ago. 

In short, the welfare system punishes work and incentivizes dependency. More concretely, the structure is such that rational actors will eschew hard work, because the more they earn, the poorer they will effectively be in terms of total resources (calculated as welfare benefits plus earnings). 

In the simplest possible terms: for many Americans, wage growth is a very, very bad thing.

We encourage readers to go back and read "When Work Is Punished: The Tragedy Of America's Welfare State," and not only because it serves as a helpful primer, but because it also underscores the degree to which exactly nothing has changed in the 30 or so months since it was written. At issue is the so-called "welfare cliff" beyond which families will literally become poorer the higher their wages, as the drop off in entitlements more than offsets the increase in earnings.

A study by the Illinois Policy Institute shows just how dramatic the effect of "falling off the cliff" (so to speak) can be. In one of the most startling findings for instance, if a single mother raising two children were to accept a pay raise from $12 to $18 per hour, her total resources would fall by nearly 33%. Here's more:

From: "Making work pay in Illinois: how welfare cliffs can trap families in poverty"

 

For single-and two-parent households in Illinois, there is a significant welfare "cliff" where the household may become worse off financially as they work more hours or as their wages increase. That is because the available welfare benefits decline by a greater amount than the increase in earned income.

 

This study analyzed a potential welfare benefits package for single- and two-parent households, both with two young children, in Cook, Lake and St. Clair counties. The potential means-tested benefits included tax credits, cash assistance, food assistance, housing assistance, child-care subsidies and health care.

 

The study’s findings for Cook County include: 

  • A wide range of benefits provides a large magnitude of support. The potential sum of welfare benefits can reach $47,894 annually for single-parent households and $41,237 for two-parent households. Welfare benefits will be available to some households earning as much as $74,880 annually. 
  • Welfare cliffs are significant and can trap families. A single mom has the most resources available to her family when she works full time at a wage of $8.25 to $12 an hour. Disturbingly, taking a pay increase to $18 an hour can leave her with about one-third fewer total resources (net income and government benefits). In order to make work "pay" again, she would need an hourly wage of $38 to mitigate the impact of lost benefits and higher taxes. 
  • The system is inequitable. A minimum wage increase to $10 an hour would push a household where both parents work for minimum wage over the welfare cliff. They would suffer a net loss in household resources of about $9,000 as reduced government benefits more than cancel out the higher wages.

As bad as this sounds on paper, it's even more stunning visually. The following graphic for Cook County shows just how financially destructive it can be for low-paid workers to try and break free of their dependence on the public purse:

There are several things to note here. First, as mentioned above, for a single mother of two, going from $12/hour to $18/hour would be a disaster, economically speaking. Her total resources (net income plus benefits) would collapse $24,840 from a peak of $63,597 to just $38,757. But perhaps the most distrubing part of the entire equation is that in this case, the single parent would have to make $38/hour before "recovering" from the welfare cliff. 

And this isn't confined to Cook County:

In all cases, net earned income and welfare benefits climb quickly from no income through part-time work at minimum wage until full-time at minimum wage ($8.25 per hour). Net earned income and benefits then plateau until a peak of $12 per hour, which is only slight greater — and probably unnoticeable — than at minimum wage. Thereafter, net earned income and benefits begin to decline until they reach a trough at $18 per hour. The drop from peak to trough is highly significant, reducing disposable income resources by more than one-third. Table 6 provides the values for each locality for the drop. For Cook County, net earned income and benefits drop $24,840, from a peak of $63,597 to a trough of $38,757. The values are nearly identical for the city of Chicago: a drop of $24,830 from a peak of $63,586 to a trough of $38,757. Although the values are lower for Lake County and St. Clair County, the drop is relatively the same, i.e., more than one-third. For Lake County, the drop is $23,396, from a peak of $61,655 to a trough of $38,259. For St Clair County, the drop is $19,408, from a peak of $58,473 to a trough of $39,065.

 

For Cook County and the city of Chicago, the parent would have to earn $38 per hour before she would make up for loss of benefits when she earned only $12 per hour.

In other words: in Illinois, a rising minimum wage is actually negative (and severely so) unless it's hiked enough to make total compensation around $80,000!

For the purpose of simplification, here is a generalized illustration of welfare cliff dynamic: 

The full report is below and you're encouraged to have a look as it goes into quite a bit of detail on the perverse incentives that emanate from the current system. For our part, we'll close with what we said on the subject in November of 2012: 

We realize that this is a painful topic in a country in which the issue of welfare benefits and cutting (or not) the spending side of the fiscal cliff have become the two most sensitive social topics. Alas, none of that changes the matrix of incentives for Americans who find themselves facing a comparable dilemma: either remain on the left side of minimum US wage and rely on benefits, or move to the right side at far greater personal investment of work, and energy, and... have the same (or much lower) disposable income at the end of the day.

Welfare Report Final

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813kml's picture

Slavery is the only solution.

NoDebt's picture

If those numbers are correct (and I think they are- they look similar to PA's welfare "curve") I should divorce my wife, give her custody of the kids, have her quit her job and pay her a nominal amount of rent to let me live in my own house.

You can see Pennsylvania's welfare cliff chart in this article:

http://www.powerlineblog.com/archives/2012/11/it-doesnt-pay-to-work.php

knukles's picture

Let's all go to the dairy Queen
We gots nuffin' else to do
But steal shit and scream

 

Just you all wait until the robots take over, genetic engineers create the Waterless Wave and there are but a few kindred souls left who been put there in some volcano by Tom Cruse's buddies let alone the Annanuki.

TeamDepends's picture

Arbeit macht nicht frei (German grammar police in 3 2 1).

Fahque Imuhnutjahb's picture

 

 

It seems that a nation as great as ours should be able to come up with some creative alternatives to help

liberate these folks from poverty and dependency.  Maybe some jobs programs, for instance we could teach

them to roll turds in gold foil, stamp a triple-a insignia on them and sell them to municipal pension

administrators for hefty margins.  OR  make a trip to Home Depot buy $100.00 worth of fasteners then get

a contract with the Defense Dept and mark the goods up 1000% and pocket the windfall.  This is the Land

of Opportunity, you just gotta get creative.  It doesn't hurt being born on second base either.

SafelyGraze's picture

the article complains because people in need are being given help.

instead of fretting over the "unfairness" of reduced assistance for those with incomes over 50k, we should be focusing on how to provide *more* assistance to those whose incomes are on the left-most end of the scale.

that way they can engage more fully in society.

and that benefits all of us.

 

Richard Chesler's picture

The land of opportunity, where a spineneless homosexual can become POTUS after only a little bankster cock. Booyah!

 

l8apex's picture

Safely, did you forget the sarcasm tags?  Do I understand you correctly that you're saying we need to increase welfare checks?  Seriously?  Do you want those recipients to ever go back to work?  Are you personally going to pay more in fed taxes to support your plan?

SafelyGraze's picture

+1

good catch.

dang it. left off the /s

how did that happen

maybe the result of hanging out with MDB again

it was a long flight, but we worked out a lot of issues.

probably will be in the news in a week or two

something about 'policy objectives' and 'new directions' and 're-layering the syrian position' and crap.

btw, asma says she never puts a sarc tag in her posts

 

Slomotrainwreck's picture

How's this for a creative alternative?

 

The best book on Free Markets evar! "The Market for Liberty"

 

PDF or EPub format

 audio book

The9thDoctor's picture

After reading this article, how many of you plan on quitting your jobs, and go get a $11 an hour job so you can qualify for these welfare programs?

Chris88's picture

I'm not one of the 62% of the country that in some form receives government money, so I guess you're right nobody does that...oh wait.

Cadavre's picture

Does ths mean we can finally start offshoring our governmental political jobs? And, will we get a tax subsidy, like corps do when they offshore US jobs?

We seem to be stuck in a mobious loop, either that or the diebold's are continually rehypothocating the same white shoe bit actors on CSPAN, over ... an over ... an over ... infinity.

 

Debt-Is-Not-Money's picture

Chrono, synclastic, infinidibulum.

...Dr. Who?

greenskeeper carl's picture

@ Nodebt, you want to divorce your wife, when she quits her job she will qualify for all kinds if section 8 subsidies, and can pay you rent that will probably exceed your mortgage. You just have to (officially, on paper) move out of the house after your divorce. She will also qualify for all sorts of TANF and EBT type benefits as well. Hard to imagine it wouldn't be more than what she makes when you factor everything in.

And that, my friends, is but a small part of how our beloved govt has destroyed the black family by incentivizing people to never marry, which of course makes it much easier for the man to abandon his family.

Oldwood's picture

The word of the day;

Perversion

 

TeamDepends's picture

Wow, Eirik Marx-Leninsson is right, socialism "works"! But does this seem like a utopia to you?

Miffed Microbiologist's picture

Believe me we have seriously looked at this option. 10 years ago we calculated we paid 5k more a year in taxes for just being married. Make me laugh to think how the gays think marriage is the best thing. Ok here's your stupid " legitimacy" you dumb fucks. You get the same benefits as domestic partners.

There are some problems in our situation that has caused us to not go down the path just yet. However it is not off the table. I don't need a piece of paper to be married to my husband. We'd gladly give each other the assets to make it work. This is what the obtrusive State has done to us.

Miffed

Midas's picture

You referred to the gays as "dumb fucks."  It's official MM.  You are the most bitchin' chick I almost know.

CCanuck's picture

I would marry you miffed, I don't care what the cost in taxes would be!

Ccanuck

Miffed Microbiologist's picture

You make me smile. And experiencing that in these times is always a gift. There is one thing I'm quite sure about. If I ever am single and ever crawl out from the grief, it is mostly likely I will be with someone from ZH. Someone out of the matrix. Rich or poor I don't care at all. And I must say, Canada is a very beautiful place.

Miffed;-)

Crocodile's picture

Maybe the beginning of that "Health, Wealth & Prosperity" gospel????

Deacon Frost's picture

"The ultimate result of shielding men from the effects of folly is to fill the world with fools"

English philosopher Herbert Spencer 1899

tarabel's picture

 

 

Nice quote. Hadn't heard that one before.

Crocodile's picture


An intelligent person learns more from one strong correction than a fool learns from being beaten a hundred times.

Implied Violins's picture

No wonder Cubs fans are so stupid.

willwork4food's picture

HEY! No dissin' the CUBS or BEARS yo!

Scooby Dooby Doo's picture

Outstanding quotes:

Shaggy: Who's your best buddy?
Scooby Doo: Raggy.

Shaggy: That's right. And who's my best buddy in the whole wide world?
Scooby Doo: Rooby Doo.

daveO's picture

Oh, woe is me! Save the single mom!

 "More concretely, the structure is such that rational actors will eschew hard work..."

  • Welfare cliffs are significant and can trap families. A single mom has the most resources available to her family when she works full time at a wage of $8.25 to $12 an hour. Disturbingly, taking a pay increase to $18 an hour can leave her with about one-third fewer total resources (net income and government benefits). In order to make work "pay" again, she would need an hourly wage of $38 to mitigate the impact of lost benefits and higher taxes. 

Single moms are not families. Single and married men(and their real families) are supporting these state-contrived families. 


kaiserhoff's picture

Phase out medicaid and section 8 housing (really free housing, utilities, cell phone, cable, etc.).

No one will starve, but the self identified "poor" will figure out what to do.

spooz's picture

Such insightful analysis...let them eat cake ("figure out what to do")

The medicaid portion of aid doesn't have a big impact, since Obamacare subsidies are phased in as income rises.  The childcare subsidy drops off suddenly, and is a major factor in allowing parents to work.  What are the alternatives? The housing is a big chunk; with rents being so high, losing that subsidy makes it harder for a family to make ends meet. The conclusion in the report is that benefits need to taper off in a more reasonable manner.

"Illinois will need to seek opportunities to streamline duplicative and overlapping programs, re-examine the eligibility limits of each program and ensure that benefits taper off in a more reasonable manner as earned income rises. In particular, the steep cutoff points for housing benefits, child-care assistance and health-care assistance will need to be addressed."

 

kaiserhoff's picture

Most of the welfare class came from the rural south, where housing is dirt cheap, and they could produce most of their own food.  That option still exists.

falconflight's picture

I bet money that a envy driven snotlicker like you doesn't pay federal income taxes.  You shitty little scumsnappers should be dragged into the street for a 'Haitian bestowal.'

WhackoWarner's picture

@spooz

 

It's me. It's Pinky?  What are we going to do tonight?

falconflight's picture

Oh, probably an act of 'luv' at a I-95 rest stop.

Amish Hacker's picture

If $12 per hour wages plus gov't benefits equals $38 per hour wages without benefits, then the benefits are worth $26 per hour. Ask yourself, can the US economy really afford that kind of benevolence?

PoasterToaster's picture
PoasterToaster (not verified) Amish Hacker Aug 7, 2015 5:32 PM

You better run down and get all that free money.  Sounds legit.

CheapBastard's picture

Where do I sign ?!

 

The Communist nations envy our welfare system. They wish for the day when they too can have a Community Organizer in charge.

chunga's picture

Just imagine what the Free Shit Generals haul in. We'll never get them off the tit.

Fahque Imuhnutjahb's picture

If we could get all these hood rats jobs on Wall Street then they could knock over the muppets instead of liquor stores.

kaiserhoff's picture

The short answer is no, but I've seen many of these studies.  About half of that "value" is the imputed cost of "free" health care, which no one in his or her right mind would pay that much for, given a choice.

Layer upon layers on madness.

ejmoosa's picture

We already know the ansawer to that question...

daveO's picture

$1 Trillion deficits say 'not for long'.

PoasterToaster's picture
PoasterToaster (not verified) Aug 7, 2015 5:32 PM

Work isn't punished.  There are no goddamn jobs.

kaiserhoff's picture

There are lots of jobs in my area.  Just none worth having, unless you work in health care, or for the government.

Everything else is a demeaning, part time, joke job, which barely compensates for the cost of getting to and from work.

Maybe other locales are different, but factor in housing cost..., and probably not.