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Welfare Payments Even to People In the Workforce Raise (Not Lower) the Wages of Such Workers

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Here’s Daniel Kuehn comment [2] in full on this post at EconLog by David Henderson [3]:

I also liked Meer’s performance very much, but I think the welfare point is more complicated than that. If welfare is only bailable [available?] if you’re not in the labor market that’s true but it is available to workers (and family members of workers) and it quite intentionally subsidizes wages.

If I understand Mr. Kuehn correctly, he here says that only if welfare payments cause some low-skilled workers to drop out of the labor force completely (or are available only to people who are not in, and who remain out of, the labor force) does welfare cause the wages paid to those low-skilled workers who remain in the labor force to rise.  Otherwise, if people who are still in the labor force are eligible for, and receive, welfare, then the wages paid to these workers is made lower by these welfare payments.

If my understanding of Mr. Kuehn’s point is correct, then he, too, is guilty (at least in this instance) of practicing the same sort of “priceless” economics that David rightly accuses James Galbraith of practicing – namely, economics disconnected from price theory.

The presumption apparently is that, because welfare gives workers some income, workers don’t ‘need’ as much income from their private employers such as Wal-Mart.  Welfare paid to people still in the labor force presumably makes such people more willing to work – or, more precisely, to work a given job at some given number of hours at wages lower than they would accept were they not receiving welfare.

This argument is completely wrong.  I dealt with it years ago here at the Cafe.  Below I supply a link to this earlier post.  But I add here the following question addressed to Mr. Kuehn (and to anyone else who supposes that having one’s income enhanced by welfare makes a worker more willing to supply some number of hours of work at an hourly wage lower than he or she would demand in the absence of such welfare payments): Why is supermodel Gisele Bündchen’s pay so high [4]?  If the labor-econ theory that Mr. Kuehn is working with is correct, surely her pay should be very, very low – near $0 – given that her husband’s (New England Patriot’s quarterback Tom Brady’s) income is astronomically high.  ‘Needing’ virtually no income of her own – because she surely can get millions of dollars annually as transfer payments from her husband – why in the world is Ms. Bündchen’s pay so darn high?

The answer, of course, is that there is a demand for supermodels and a supply of supermodels – and given this demand and this supply, Ms. Bündchen’s equilibrium wage is very high.  Her husband’s extraordinarily high salary does not “subsidize” employers of supermodels by enabling them to pay Ms. Bündchen less than they would otherwise have to pay her.  (Note: I could have here reversed the question to ask why is Tom Brady’s salary so high given that his wife is one of world’s most highly paid workers.  Is Ms. Bündchen’s salary “subsidizing” the New England Patriots by enabling that franchise to pay its star quarterback less than it would have to pay him were he married to a woman paid less than Ms. Bündchen?  Of course not – but, again, anyone who believes that welfare payments to people currently in the work force cause these workers’ pay to fall would, logically, have also to believe that Ms. Bündchen’s high pay works as a subsidy to the New England Patriots by causing Tom Brady’s pay to fall.)

Mr. Kuehn (again, assuming that I read his comment correctly) is working here with some theory of wage determination other than a price-theoretic one.  Welfare payments (other than EITC) most plausibly reduce the supply of labor by making welfare recipients less willing to work – and, thus, causing the wages that must be paid to such workers to be higher (not lower) than otherwise.  Even more emphatically, such payments are highly unlikely to increase the supply of labor – which is what would have to happen if such payments were to “subsidize wages” (that is, to enable Wal-Mart and other employers of welfare-receiving workers to pay wages lower than they would pay were such welfare programs non-existent).

I should confess that I struggle to make sense of this argument (that welfare payments to current workers lower their wages).  The argument is so detached from – indeed, it’s in conflict with – any economics that I’m familiar with.  The argument is missing (among many other things) any role for competition: If welfare-receiving worker Jones can produce $X per hour of value for employers, employers will bid Jones’s hourly wage up to $X regardless of Jones’s other sources of income.  So unless the argument is that the receipt of welfare makes Jones refuse to have his or her wages bid up, it’s impossible for me to see how welfare payments to Jones cause the equilibrium wage for welfare-receiving Joneses to fall.

Here’s my response from several years ago to those who believe (as, I gather, Mr. Kuehn believes) that the availability of government welfare payments to people currently in the workforce cause the wages of such workers to fall [5].  And don’t miss my colleague Bryan Caplan’s much better busting of the myth that welfare subsidizes Wal-Mart and other employers of poor workers [6].

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