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When Work Is Punished: The Ongoing Tragedy Of America's Welfare State
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.
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Remove the Fed's monopoly and you shall solve many more problems than just "well-not-so-fair."
It is still a justified bash regardless of the "monetary" conduit.
The Bottom line is this: The American "Dream" is dead. If it was ever truly real to begin with that is. This system is becoming just another failed state with no workable solutions to improve the human condition and evolve. We stay stuck in the dung heap of the universe. It's simply a Top Heavy Nation and those at the top are pollishing the brass on the Titanic right now.
"They call it the American Dream because you have to be asleep to believe it."
- George Carlin
stealing? work punished or stealing
value is highly encouraged?
i would like to find the time to
go to a park to sort it out, someday
Do it!
Make sure it is a doggie park and give them lotza treats and praises!
...Oh yeah, don't forget to pick up their mess!
If you're a bankster, stealing is rewarded. "Corruption is why we win!"
https://www.youtube.com/watch?v=kwRgIX3D8eQ
If you're a bankster, stealing is rewarded. "Corruption is why we win!"
https://www.youtube.com/watch?v=kwRgIX3D8eQ
Wonder how much the corps and rich would suffer if we yanked all the subsidies, tax dodges and what not. I guess we can't. We'll have to keep things the way they are.
Well, the corporations wanted to be treated as people vis-a-vis "Citizens United" . . . so I say we give them what they want . . .
And treat them as people vis-a-vis PFICs and offshore corporate taxation like they do the 7-8 million American citizens living and working overseas.
If they want to have same 1st Amendment rights as people, then let the corporations also pay taxes just like living, breathing people.
And that means goodbye to all the hiding/stashing of capital overseas and avoiding the taxes because they did not bring the capital stateside. If living and breathing bodies have to report and pay taxes on any bank balances above an aggregate $10,000 HIGH BALANCE (not end-of-year balance) of any foreign account using FBAR form and report it to US Treasury, then let Apple and General Motors do and pay taxes on the same.
Google "FATCA" and see what it's really like to be an American overseas . . . and then apply the rules to American corporations as well.
I'm only saying this because the corporations asked to be treated as people when they asked for those 1st Amendment rights under the "Citizens United" case.
Just one more issue of bipolar USA.
"Wage growth - or a persistent lack thereof - has become something of a hot topic in America. "
What the heck did amerikans think would happen when the production was off shored to Asia (China) and they flocked to Walmart to get all that cool cheap stuff?
What the heck do amerikans think will happen when foreign workers are imported via H1B visa's to do the work Americans were promised by the government and corporations,,, while today the big political topic is Hillery's hair?
What the heck do amerikans think will happen when they hire contractors that use illegal immigrant labor while they make sanctuaries of their cities for them to hide in and issue them drivers licenses.
Amerikans are bipolar and speak with forked tongue.
New Study!
Most Americans Poor Enough That Economic Collapse Won't Phase Them.
Transfer payments are designed to enhance consumption and are an integral part of the corporatist model. Whe your neighbor is paying your food bill, you have extra $$$ for an i phone or car payment....
The average America has been brainwashed into thinking that their servants in government are instead their masters. THEY ARE FUCKING SERVANTS! Direct taxes must be apportioned. That has never changed. Stop naming sources!
Amendment XVIThe Congress shall have power to lay and collect taxes on incomes, from whatever source derived,
The income tax is a tariff. "In this case -- that of a stockholder against a corporation to restrain the latter from voluntarily paying the income tax imposed by the Tariff Act of 1913 -" Brushaber v Union Pacific R.R. (Supreme court case declaring income tax as constitutional.)
capitalism doesn't work, there isn't any incentive to work under capitalism unless you own capital then you need labor. sorry the whole system is broken and it never worked in the first place it's just fuedalism in disguise.
Feudalism is just a political system. Not an economic one. And not so dissimilar to a capitalist system where neither you nor your capital are free to move around but are instead bound to the land.
This bound is called nationality.
communism and socialism don't work, there isn't any incentive to work under communism and socialism because you can be a lazy fat ass living off the labor of others. sorry the whole communism and socialism system is broken and it never worked in the first place it's just Marxist bullshit in disguise.
I suspect that this report is based on a idealized case in which the woman collects every single benefit that may be available to a maximum extent. In the real world this seldom occurs.
Section 8 funds are so limited, for instance, that most applicants die or cease to be eligible before their name comes up on a waiting list that averages three years. Child-care assistance is dependent on being able to get the children into one of the few eligible providers. TANF is time-limited; few people will still be eligible for TANF by the time their name comes up for Section 8.
Most of the poor derive their main benefits from some form of Disability payment, either SSI or SSDI. Either one of course penalizes any form of work with severe reduction of payments as well as interminable harassment since "disability" implies an inability to work -- although for many people, it consists of being chronically ill in such a manner as precludes working a standard 40-week schedule or one of those "part-time" Wal-Mart jobs that requires 24/7 availability. The laws assume low-paying employment, and work very poorly for individuals who can afford ordinary life expenses out of a 20-hour schedule at their normal hourly pay, but cannot maintain health coverage without qualifying for government benefits. Tougher labor laws requiring employer flexibility and flat universal government health coverage could save the government a buttload of money on these people. But of course, we can't have Socialized Medicine. Because the vultures are entitled to megabillion profits on sick people.
Problems like this will exist as long as America is unwilling to grow up and confront its core irrationalisms. Greed is NOT good. It's not even terribly efficient.