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Do Benefits Benefit The Workers Or The Employers Paying Scummy Wages?

by | 27th, February 2014

THERE’S an argument around and about the place that paying benefits to poor people just ends up as a subsidy to the people who pay them scummy wages. The argument being that as the taxpayer is picking up part of the bill of keeping body and soul together then the employer can get away with paying peanuts.

To which my usual response has always been, well, great, let’s abolish all benefits then and see whether wages rise.

However, I’ve rather changed my mind as a result of this point:

As long as non-workers remain eligible for poverty programs, the answer is no. This is basic supply-and-demand. When the government offers free stuff to people with low incomes, the marginal benefit of work falls – and so does labor supply. When labor supply falls, hours of work go down, and wages rise. This could be very nice from the point of view of Walmart’s workers. From the point of view of Walmart’s stockholders however, it’s bad.

Not convinced? Ask yourself: “If I ran Walmart, would I favor higher unemployment benefits?” Of course not. Why not? Because higher unemployment benefits make it easier to not apply for a job at Walmart. The same goes for any government program that makes idleness less unpalatable.

I hadn’t thought of it that way and I should have.

If you can get the bennies for not working then clearly they’re not a subsidy to the employers. Thus housing benefit, unemployment pay, free school meals, all of these sorts of things, are not benefits to the employer. They’re benefits to the employee which is great because that’s why we pay them.

However, we can also look at other benefits and see whether they benefit the employer. And there is one that does: tax credits. Because you must actually be in work to get this. It’s a top up to your low wages. And yes, this does make you more likely to go to work for someone paying those low wages: thus at least some of the benefit goes to the employer, not the employee.

The real fun here is of course that tax credits were brought in by one G. Brown when he was Labour Chancellor.



Posted: 27th, February 2014 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink