Does Welfare Subsidize Employers?

Source: The Pitifully Low Wages of Economic Illiteracy – Cafe Hayek

Leo Gertner (Letters, August 27) repeats a favorite trope of the left – namely, that welfare payments received by low-wage workers are really subsidies to employers who allegedly reduce workers’ pay by the amount of government welfare benefits received by these workers. There are several flaws with this trope.

First, it’s backwards. By reducing the economic burden of being unemployed, welfare payments not tied to work requirements reduce the supply of low-skilled labor and, thus, raise – rather than lower – the wages that employers pay to such workers.

Second, it’s at odds with readily observable labor-market realities. If workers reduce their wage demands because they have outside income, then whenever two highly paid professionals marry each other, one of them over time would come to be paid no more than the minimum wage. (Mr. Gertner and other Progressives would then argue that employers of these low-paid physicians, lawyers, and other professionals are “subsidized” by the employers of these employees’ high-paid spouses.) But of course we observe no such thing.

Third, if this trope were indeed correct, then the most direct way to protect taxpayers from having to subsidize employers would be to abolish the government welfare programs. When their welfare benefits disappear, low-wage workers will demand, and receive from their employers, higher pay to replace the lost benefits. But because Mr. Gertner and others who repeat this trope surely oppose abolition of the welfare programs that they assert are subsidies to employers, it’s unlikely that even they really believe this trope.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030