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Archive for the ‘Jobs’ Category

I shared a video last year that pointed out that Americans live in a nation that became prosperous thanks to “creative destruction.”

That’s the term developed by Joseph Schumpeter to describe the economic churning caused by competition, innovation, and markets (international trade is just a minor part of this process, though it’s the part that generates the most controversy).

The bad news is that some people lose their jobs as the economy evolves and changes. And some companies go bankrupt. There are real victims and tragic stories.

But the good news is that other jobs are created. And entrepreneurs start new businesses.

And the better news is that our living standards increase. Especially over time. Even for many of those who lost jobs in the short run.

That’s why we’re much richer, on average, than our parents and grandparents.

Needless to say, a key measure of a healthy and dynamic economy is for the job gains to exceed the job losses.

So when I spoke to congressional staff earlier this week about trade and protectionism, I figured I should go beyond theory and include some numbers.

I went to the relevant website at the Bureau of Labor Statistics and found that more than 28 million jobs were lost in 2017 (final data for 2018 is still not available).

That sounds terrible. And for many workers, it was horrible news.

But the good news, as you can see in the screenshot below (click to expand), is that the U.S. economy created more than 30 million new jobs that year.

The obvious takeaway from this data is that the crowd in Washington should adopt policies that ensure we have strong growth so that people who lose jobs have lots of good options for new employment.

In other words, don’t impose the kind of policies that have created high unemployment and economic stagnation in many European welfare states.

For what it’s worth, that message seems to be lost on Bernie Sanders, who has a long list of policies that would turn America into a version of GreeceFrance, and Italy.

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Time for a confession.

I don’t particularly enjoy writing columns about the minimum wage because it’s such a slam-dunk issue. Simply stated, it is cruel and illogical when politicians mandate wage levels that are higher than the productivity of low-skilled workers.

Yet, at the risk of being repetitive, I periodically share evidence showing that higher minimum wages lead to more unemployment (see here, here, here, here, here, here, here, here, here, and here).

The issue also is disturbing because I’ve had several friends on the left privately admit that they understand that jobs are lost when the minimum wage goes up, but they think that’s okay because it’s a good political issue for their side.

How utterly immoral. And racist, at least in outcome if not intent.

Today, though, I’m actually excited to write about the topic because I have a new angle.

As reported by the New York Times, a bunch of millionaire celebrities are trying to convince the governor of New York to raise the minimum wage for restaurant staff.

…a group of Hollywood actresses waving the banner of the Time’s Up movement have been pressing Gov. Andrew M. Cuomo to apply New York’s minimum wage to workers who earn tips, arguing that it would make waitresses less vulnerable to sexual harassment. Among the celebrities weighing in are Sarah Jessica Parker, Michelle Williams, Amy Poehler and Amy Schumer. …advocates like Ms. Jayaraman and celebrity activists are focused on state-by-state battles. Last week, Hillary Clinton wrote to Mr. Cuomo and other leaders in Albany, calling on them to eliminate the lower wage for tipped workers. …a letter sent to Mr. Cuomo by Hollywood celebrities including Ms. Poehler, Reese Witherspoon and Natalie Portman…urged the governor to eliminate the lower minimum wage for servers.

Do the workers appreciate this display of “solidarity” from the Hollywood crowd?

Not exactly.

Waitresses and other servers are resisting the proposal, saying they can make more money from tips and do not need celebrities to help protect them from harassment. …In New York City, many servers at busy restaurants and bars earn more than enough in tips to push their hourly wage well above the $15 minimum. …Raising wages for tipped workers, many waitresses say, could threaten an economic lifesaver if it forces restaurants to change tipping policies or, worse, puts them out of business.

The best part of the story is that the supposed beneficiaries clearly have a much better understanding of economics than the virtue-signaling celebrities.

…“The resounding message from servers in New York to these actresses in Hollywood is to just leave us alone,” said Maggie Raczynski, a bartender at an Outback Steakhouse in upstate New York. “These celebrities have literally no idea. I feel like they need to butt out.” …D. Sweeney, a former actor who said he made a “very comfortable living” as a bartender in New York, was adamant about his opposition to the proposed change. …Raising restaurant labor costs any further, he said, could trigger several changes in the business model that would hurt workers more than they would help. “Immigrant support staff will be the first to be fired,” he said. …The servers fired back in a letter to the actresses, saying, “Thank you for your concern. But we don’t need your help and we’re not asking to be saved.” In an interview this week, Ms. Raczynski said her employer had already trimmed staff to offset the steady rise in wages that Mr. Cuomo championed a few years ago.

This is a heartwarming story.

The fact that restaurant owners are opposed to intervention is not surprising, but it’s great to see that restaurant workers are savvy enough to realize that they’ll get hurt if politicians increase the minimum wage.

Reminds me of the great story from Seattle when employers and workers both protested against additional tax hikes on companies.

To paraphrase an evil man, “workers and capitalists of the world unite!”

Let’s close by recycling this video tutorial on the minimum wage.

P.S. Switzerland doesn’t have a minimum wage, and Swiss voters very much prefer that outcome.

P.P.S. You can enjoy additional cartoons on the minimum wage by clicking here and here.

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When I write about Social Security, I normally focus on the program’s huge fiscal imbalance ($44 trillion and climbing).

But it’s not just a fiscal crisis. Social Security is also an increasingly bad deal for workers. Especially minorities with lower average lifespans. When compared to what they would get from a private retirement system, people are paying in too much and getting out too little.

There’s also another major problem with the program.

Academic experts have quantified how older workers are lured out of the labor force when they get money from the government. And since economic output is a function of the quality and quantity of labor and capital, this means we’re sacrificing wealth and reducing prosperity.

Here are some excerpts from a study by Professors Daniel Fetter and Lee Lockwood.

Many of the most important government programs, including Social Security and Medicare, transfer resources to older people… Standard economic theory predicts that such programs reduce late-life labor supply and that the implicit taxation reduces the ex-post value of the programs to recipients. Understanding the size and nature of such effects on labor supply and welfare is an increasingly important issue, as demographic trends have increased both the potential labor supply of the elderly and its aggregate importance, while simultaneously increasing the need for reforms to government old-age support programs. …We address these questions by investigating Old Age Assistance (OAA), a means-tested program introduced in the 1930s alongside Social Security that later became the Supplemental Security Income (SSI) program.

Here are charts illustrating how people are retiring earlier in part because of government payments.

And here are some calculations from the study.

Our estimates indicate that OAA significantly reduced labor force participation among older individuals. The basic patterns that we explore in the data are evident in Figure 2, which plots male labor force participation by age, separately for states with above- and belowmedian OAA payments per person 65 and older. Up to age 65, the age pattern of labor force participation was extremely similar in states with larger and smaller OAA programs. At age 65, however, there was a sharp divergence in labor force participation between states with larger OAA programs relative to those with smaller programs, and this divergence continued at older ages. Our regression results, which isolate variation in OAA program size due to state policy differences, imply that OAA can explain more than half of the large 1930–40 drop in labor force participation of men aged 65–74. …Our results suggest that Social Security had the potential to drive at least half—and likely more—of the mid-century decline in late-life labor supply for men. …Taken as a whole, our results suggest that government old-age support programs can have large effects on labor supply, through both their transfer and taxation components.

This chart captures how old-age payments in various states were associated with varying degrees of labor force participation.

By the way, I’m not sharing this information because it’s bad for people to retire at some point.

I’m merely establishing that there’s academic support for the common-sense observation that people are more likely to leave the labor force when there’s an alternative source of income (though it’s worth noting that there should be a sensible and sustainable system for providing that retirement income).

Moreover, people are likely to stop working when government systems give them money before age 65.

Three academics, Andres Erosa, Luisa Fuster, and Gueorgui Kambourov, have a study quantifying this problem in European nations.

There are substantial differences in labor supply and in the design of tax and transfer programs across countries. The cross-country differences in labor supply increase dramatically late in the life cycle…while differences in employment rates among eight European countries are in the order of 15 percentage points for the 50-54 age group, they increase to 35 percentage points for the 55-59 age group and to more than 50 percentage points for the 60-64 age group. In this paper we quantitatively assess the role of social security, disability insurance, and taxation for understanding differences in labor supply late in the life cycle (age 50+) across European countries and the United States. … The social security, disability insurance, and taxation systems in the United States and European countries in the study are modelled in great detail.

Here’s a sampling of their results.

The main findings are that the model accounts fairly well for how labor supply decreases late in the life cycle for most countries. The model matches remarkably well the large decline in the aggregate labor supply after age 50 in Spain, Italy, and the Netherlands. The results support the view that government policies can go a long way towards accounting for the low labor supply late in the life cycle for these European countries relative to the United States, with social security rules accounting for the bulk of these effects… relative to the United States, the hours worked by men aged 60-64 is…49% in the Netherlands, 66% in Spain, 44% in Italy, and 29% in France. …government policies can go a long way towards accounting for labor supply differences across countries. Social security rules account for the bulk of cross country differences in labor supply late in the life cycle (with its contribution varying from 50% to 100%), but other policies also matter. In accounting for the low labor supply relative to the US at ages 60 to 64, taxes matter importantly in the Netherlands (6%), Italy (6%), and France (5%); disability insurance policies are important for the Netherlands (7%) and Spain (10%).

And here’s one of their charts comparing hours worked at various ages in Switzerland, Spain, France, and the United States.

The good news is that we don’t push people out of the labor force as much as the French and the Spanish.

The bad news is that we’re not as good as Switzerland (probably in part because the Swiss have a retirement system based on private saving, so they have the ideal combination of good work incentives and comfortable retirement).

But it shouldn’t matter whether other countries have good systems or bad systems. What does matter is that America’s demographic profile is changing. We’re living longer and having fewer children and our system of entitlements is a mess.

We should be reforming these programs, both for fiscal reasons and economic reasons.

P.S. It’s not just Social Security. Other programs also lure people out of the job market and into government dependency, with Obamacare being an especially harmful example.

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Washington is a place that gets infatuated with trendy ideas. A few years ago, everyone was talking about a “universal basic income” because of the strange assumption that millions of people will be unemployable in the future.

That idea was mostly embraced by folks on the left (though not Joe Biden), but there’s now a related idea on the right to provide “wage subsidies” so that unemployable (or difficult to employ) people can get work.

A leading proponent is Oren Cass of the Manhattan Institute, who wrote The Once and Future Worker: A Vision for the Renewal of Work in America.

National Review published an excerpt from his book.

Work has enormous social value for the individuals who engage in it and for the formation and stability of their families, the opportunities of their children, and the vibrancy of their communities. Ideally, the labor market would settle in a place where productive, family-supporting work was available to all people in all places. But nothing in the theory of economics guarantees such an outcome… If we really want to “pay for jobs” — and we should — then we should do it directly. …a…“Federal Work Bonus,”…an additional $3 into your check for every hour worked? That would be a wage subsidy. …a wage subsidy aims to produce that effect in the labor market. Workers unwilling to sell their labor for less than $12 per hour may be worth only $9 per hour to an employer. No job will emerge in that scenario. With the insertion of a $3-per-hour wage subsidy, by contrast, the employer can pay the $9 per hour that the work is worth and the worker can receive the $12 per hour that he demanded. Thus will appear a job where none existed before. …The value of the subsidy would be set relative to a “target wage” of, say, $15 per hour and would close half the gap between the market wage and the target. A worker would initially receive a subsidy of $3 per hour in this case, equal to approximately $6,000 per year if he worked full-time.

The wage subsidy Cass advocates is similar to the “earned income tax credit,” which is basically a redistribution program that is administered through the tax code.

But Cass wants the EITC to be universally available rather than primarily targeted at households with children.

The federal earned income-tax credit (EITC) already operates something like a wage subsidy, offering low-income households large tax refunds that can exceed what they paid in taxes to begin with. But the EITC gets paid long after the income is earned — at tax time the following year — based on an opaque formula. It creates none of a wage subsidy’s immediate, transparent effect in the labor market. …The EITC also skews its benefits heavily toward households with children. A single person working full-time at minimum wage would get a credit of $41, less than 1 percent of what his colleague with kids can expect.

For what it’s worth, Cass acknowledges that employers might capture some of the benefits of a wage subsidy.

If the government offers a $3 subsidy atop a $9-per-hour job, the result will not necessarily be a $12-per-hour job. The employer might instead cut the market wage to $8, to which the government would add $3.50 — half the $7 gap to the target wage of $15 — leaving the worker with $11.50. …How workers and employers respond to the subsidy will vary based on labor-market conditions. What we do know from studies of the EITC and a similar program in the United Kingdom is that, in those instances, roughly 75 percent of the financial benefit accrued to workers.

Now let’s discuss the policy implications.

Cass openly admits that a wage subsidy is a form of redistribution, and – much to my dismay – he doesn’t object if at least some of that new spending is financed by higher taxes.

Subsidizing wages is a particularly well-tailored response to the challenges that globalization presents for American workers. First, the wage subsidy is the appropriate mechanism for redistributing gains from the economy’s “winners” to its “losers.” It comes closest to doing this directly, by taking tax revenue drawn from higher earners and inserting it directly into the paychecks of lower earners. …it is redistribution. And yes, high-income taxpayers will finance it. …The roughly $200 billion price tag for a wage subsidy might require some new tax revenue, but its funding could come largely from the existing safety net, which already dedicates more than $1 trillion annually to low-income households — including many with workers.

The following excerpt also rubbed me the wrong way since he seems to be saying that it would be better if Washington had expanded redistribution instead of lowering the corporate tax rate.

…in debates over the 2017 tax-reform package, which ultimately increased the ten-year federal deficit by $1.5 trillion for the sake of reducing the corporate tax rate, while failing to deliver even the small EITC increase for childless workers that Ryan had once championed. Indeed, while the Khanna proposal in its 2017 form is not a serious one, even it could have been implemented more cheaply than the tax reform that ultimately passed. The deficit spending would have been equally costly, but at least the labor market and its low-wage workers would have been the chief beneficiaries. …the Republican party’s relative disinterest in the labor market is made apparent by its preference for a tax cut over a wage subsidy.

This is very troubling. In the long run, faster growth is much better for low-income workers.

I’m not the only skeptic of this plan.

Writing for the Week, AEI’s Jame Pethokoukis argues that Cass bases his idea on a misreading of the economy.

One of his innovative analytical insights is that economic growth from globalization is bad for workers. …This is a terrible reading of history… America would be worse off today if it had somehow kept the closed “golden age” economy of the 1950s and 1960s. Its lack of openness greatly harmed American workers… Too much of American industry became complacent, unproductive… Likewise, would America have a more thriving economy today without Silicon Valley? …Cass’ reading of the data isn’t much better as he adopts the stance of many leftists that most Americans are no better off than decades ago. Yet a recent Congressional Budget Office study shows a nearly 50 percent increase in middle-class incomes since 1970, with incomes for the bottom fifth up some 80 percent.

And Michael Strain, also with the American Enterprise Institute, was similarly critical in a column for Bloomberg.

Economic growth is under attack. Or, more specifically, the idea that public policy should place a large amount of emphasis on the economy’s rate of growth is under assault… Traditionally, conservatives have placed a premium on growth as the best way to advance the fortunes of all Americans. But in recent years, some on the right have [been] playing down the importance of growth to the well-being of many working-class Americans. The latest argument for that position comes from Oren Cass… Cass argues that the results from decades of policies designed to encourage GDP growth are “embarrassing” and have “steered the nation off course.” …conservatives have been right in their traditional focus on growth. Let’s recall why. …the hot U.S. economy is the best jobs program available for lower-wage and vulnerable workers. …this strength is benefiting low-wage workers more than other groups. …Growth doesn’t just help low-income and working-class households in the short term. Over longer periods, seemingly small changes in the growth rate have large consequences. In the past four decades, for example, real GDP per person has increased from about $28,000 to over $55,000, growing at about 1.7 percent per year. If growth instead had been 1 percent, average GDP per head would be about three-quarters what it is today.

Needless to say, I strongly agree with Strain’s final point about the importance of faster growth.

Though I confess to being at a disadvantage when judging these anti-Cass columns since I haven’t read the book.

However, to the degree that Cass truly has given up on growth (i.e., accepting some form of the “secular stagnation” hypothesis), then I side with Pethokoukis and Strain.

But that’s not my main concern. Here are the four reasons that motivate my objection to wage subsidies.

  1. Redistribution should not be a responsibility of the federal government. Indeed, I want all redistribution devolved to state and local governments (or to the private sector).
  2. Cass says the program will cost $200 billion. Like with most government programs, I assume the actual fiscal burden will wind up being much higher. Especially after the left starts a bidding war.
  3. Existing wages subsidies are riddled with fraud because the government effectively gives people lots of money simply for filing a tax return, yet rarely bothers to confirm they actually earned the income.
  4. Wage subsidies actually turn into wage penalties (i.e., punitive implicit marginal tax rates) when income rises above the target level and the handouts are withdrawn.

The bottom line is that Cass is right that it’s better to subsidize work rather than idleness.

However, Americans already are too dependent on Uncle Sam. It would be even better if we simply achieved more growth by adopting the tried-and-tested recipe for prosperity.

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Politicians can interfere with the laws of supply and demand (and they do, with distressing regularity), but they can’t repeal them.

The minimum wage issue is a tragic example. If lawmakers pass a law mandating wages of $10 per hour, that is going to have a very bad effect on low-skilled workers who can only generate, say, $8 of revenue per hour.

You don’t need to be a libertarian to realize this is a problem.

Catherine Rampell leans to the left, but she warned last year in the Washington Post about the danger of “helping” workers to the unemployment line.

…the left needs to think harder about the unintended consequences of…benevolent-seeming proposals. In isolation, each of these policies has the potential to make workers more costly to hire. Cumulatively, they almost certainly do. Which means that, unless carefully designed, a lefty “pro-labor” platform might actually encourage firms to hire less labor… It’s easier, or perhaps more politically convenient, to assume that “pro-worker” policies never hurt the workers they’re intended to help. Take the proposal to raise the federal minimum wage to $15 an hour… raising wages in Seattle to $13 has produced sharp cuts in hours, leaving low-wage workers with smaller paychecks. And that’s in a high-cost city. Imagine what would happen if Congress raised the minimum wage to $15 nationwide. …Why wouldn’t you want to improve the living standards of as many people as possible? The answer: You won’t actually be helping them if making their labor much more expensive, much too quickly, results in their getting fired.

By the way, while I’m glad Ms. Rampell recognizes how big increases in the minimum wage will have an adverse impact, I think she is rather naive to believe that there are “carefully designed” options that wouldn’t be harmful.

Or does she have a cutoff point for acceptable casualties? Maybe she thinks that an increase in the minimum wage is bad if it throws 500,000 people into unemployment, but a small increase that leads to 200,000 fewer jobs is acceptable?

In any event, the voters of DC apparently didn’t read her column and they voted earlier this year to restrict the freedom of employers and employees in the restaurant sector to engage in voluntary exchange.

But then something interesting happened. Workers and owners united together and urged DC’s government to reverse the referendum.

The Wall Street Journal opined on this development.

…last week Washington, D.C.’s Democratic city councillors moved to overturn a mandatory minimum wage for tipped workers after bartenders, waiters and restaurant managers served up a lesson in economics. …The wage hike was billed as a way to give workers financial stability… But tipped workers realized the policy came with serious unintended consequences. …workers pushed for repeal. Though restaurants pay a $3.89 hourly wage to tipped workers, “we choose these jobs because we make far more than the standard minimum wage” from tips, bartender Valerie Graham told the City Council. …“Increasing the base wage for tipped workers who already make well above minimum wage threatens those who do not make tips,” such as cooks, dishwashers and table bussers, Rose’s Luxury bartender Chelsea Silber told the City Council. …Repeal requires a second council vote, but Democratic Mayor Muriel Bowser says she agrees. Congratulations on the revolt of the restaurant masses.

Let’s review another example.

There’s now a mandate for a higher minimum wage in New York. Ellie Bufkin explains some of the consequences in a column for the Federalist.

This minimum wage spike has forced several New York City businesses to shutter their doors and will claim many more victims soon. Businesses must meet the $15 wage by the end of 2018, the culmination of mandatory increment increases that began in 2016. …For many businesses, this egregious law is not just an inconvenience, it is simply unaffordable. The most recent victim is long-time staple, The Coffee Shop… In explaining his decision to close following 28 years of high-volume business, owner Charles Milite told the New York Post, “The times have changed in our industry. The rents are very high and now the minimum wage is going up and we have a huge number of employees.” …Of all affected businesses, restaurants are at the greatest risk of losing their ability to operate under the strain of crushing financial demands. They run at the highest day-to-day operational costs of any business, partly because they must employ more people to run efficiently. …Eventually, minimum wage laws and other prohibitive regulations will cause the world-renowned restaurant life in cities like New York, DC, and San Francisco to cease to exist.

For what it’s worth, I don’t think restaurants will “cease to exist” because of mandates for higher minimum wages.

But there will definitely be fewer establishments with fewer workers.

Why? Because business aren’t charities. They hire workers to increase profits, so it’s unavoidable that we get bad results when government mandates result in some workers costing more than the revenue they generate.

Which is what we’re now seeing in Seattle.

I’ll close by recycling this debate clip from a few years ago. I made the point that faster growth is the right way to boost wages.

And I also gave a plug for federalism. If some states want to throw low-skilled workers out of jobs, I think that will be an awful outcome. But it won’t be as bad as a nationwide scheme to increase unemployment (especially for minorities).

P.S. As is so often the case, the “sensible Swiss” have the right perspective.

P.P.S. Here’s a video making the case against government wage mandates. And here’s another interview I did on the topic.

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One of the more elementary observations about economics is that a nation’s prosperity is determined in part by the quantity of quality of labor and capital. These “factors of production” are combined to generate national income.

I frequently grouse that punitive tax policies discourage capital. There’s less incentive to invest, after all, if the government imposes extra layers of tax on income that is saved and invested.

Bad tax laws also discourage labor. High marginal tax rates penalize people for being productive, and this can be especially counterproductive for entrepreneurship and innovation.

Though we shouldn’t overlook how government discourages low-income people from being productively employed. Only the problem is more on the spending side of the fiscal equation.

In today’s Wall Street Journal, John Early and Phil Gramm share some depressing numbers about growing dependency in the United States.

During the 20 years before the War on Poverty was funded, the portion of the nation living in poverty had dropped to 14.7% from 32.1%. Since 1966, the first year with a significant increase in antipoverty spending, the poverty rate reported by the Census Bureau has been virtually unchanged. …Transfers targeted to low-income families increased in real dollars from an average of $3,070 per person in 1965 to $34,093 in 2016. …Transfers now constitute 84.2% of the disposable income of the poorest quintile of American households and 57.8% of the disposable income of lower-middle-income households. These payments also make up 27.5% of America’s total disposable income.

This massive expansion of redistribution has negatively impacted incentives to work.

The stated goal of the War on Poverty is not just to raise living standards, but also to make America’s poor more self-sufficient and to bring them into the mainstream of the economy. In that effort the war has been an abject failure, increasing dependency and largely severing the bottom fifth of earners from the rewards and responsibilities of work. …The expanding availability of antipoverty transfers has devastated the work effort of poor and lower-middle income families. By 1975 the lowest-earning fifth of families had 24.8% more families with a prime-work age head and no one working than did their middle-income peers. By 2015 this differential had risen to 37.1%. …The War on Poverty has increased dependency and failed in its primary effort to bring poor people into the mainstream of America’s economy and communal life. Government programs replaced deprivation with idleness, stifling human flourishing. It happened just as President Franklin Roosevelt said it would: “The lessons of history,” he said in 1935, “show conclusively that continued dependency upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber.”

In another WSJ column on the same topic, Peter Cove reached a similar conclusion.

America doesn’t have a worker shortage; it has a work shortage. The unemployment rate is at a 15-year low, but only 55% of Americans adults 18 to 64 have full-time jobs. Nearly 95 million people have removed themselves entirely from the job market. According to demographer Nicholas Eberstadt, the labor-force participation rate for men 25 to 54 is lower now than it was at the end of the Great Depression. The welfare state is largely to blame. …insisting on work in exchange for social benefits would succeed in reducing dependency. We have the data: Within 10 years of the 1996 reform, the number of Americans in the Temporary Assistance for Needy Families program fell 60%. But no reform is permanent. Under President Obama, federal poverty programs ballooned.

Edward Glaeser produced a similar indictment in an article for City Journal.

In 1967, 95 percent of “prime-age” men between the ages of 25 and 54 worked. During the Great Recession, though, the share of jobless prime-age males rose above 20 percent. Even today, long after the recession officially ended, more than 15 percent of such men aren’t working. …The rise of joblessness—especially among men—is the great American domestic crisis of the twenty-first century. It is a crisis of spirit more than of resources. …Proposed solutions that focus solely on providing material benefits are a false path. Well-meaning social policies—from longer unemployment insurance to more generous disability diagnoses to higher minimum wages—have only worsened the problem; the futility of joblessness won’t be solved with a welfare check. …various programs make joblessness more bearable, at least materially; they also reduce the incentives to find work. …The past decade or so has seen a resurgent progressive focus on inequality—and little concern among progressives about the downsides of discouraging work. …The decision to prioritize equality over employment is particularly puzzling, given that social scientists have repeatedly found that unemployment is the greater evil.

Why work, though, when government pays you not to work?

And that unfortunate cost-benefit analysis is being driven by ever-greater levels of dependency.

Writing for Forbes, Professor Jeffrey Dorfman echoed these findings.

…our current welfare system fails to prepare people to take care of themselves, makes poor people more financially fragile, and creates incentives to remain on welfare forever. …The first failure of government welfare programs is to favor help with current consumption while placing almost no emphasis on job training or anything else that might allow today’s poor people to become self-sufficient in the future. …It is the classic story of giving a man a fish or teaching him how to fish. Government welfare programs hand out lots of fish, but never seem to teach people how to fish for themselves. The problem is not a lack of job training programs, but rather the fact that the job training programs fail to help people. …The third flaw in the government welfare system is the way that benefits phase outs as a recipient’s income increases. …a poor family trying to escape poverty pays an effective marginal tax rate that is considerably higher than a middle class family and higher than or roughly equal to the marginal tax rate of a family in the top one percent.

I like that he also addressed problems such as implicit marginal tax rates and the failure of job-training programs.

Professor Lee Ohanian of the Hoover Institution reinforces the point that the welfare state provides lots of money in ways that stifle personal initiative.

Inequality is not an issue that policy should address. …Society, however, should care about creating economic opportunities for the lowest earners. …a family of four at the poverty level has about $22,300 per year of pre-tax income. Consumption for that same family of four on average, however, is about $44,000 per year, which means that their consumption level is about twice as high as their income. …We’re certainly providing many more resources to low-earning families today. But on the other hand, we have policies in place that either limit economic opportunities for low earners or distort the incentives for those earners to achieve prosperity.

I’ve been citing lots of articles, which might be tedious, so let’s take a break with a video about the welfare state from the American Enterprise Institute.

And if you like videos, here’s my favorite video about the adverse effects of the welfare state.

By the way, it isn’t just libertarians and conservatives who recognize the problem.

Coming from a left-of-center perspective, Catherine Rampell explains in the Washington Post how welfare programs discourage work.

…today’s social safety net discourages poor people from working, or at least from earning more money. …you might qualify for some welfare programs, such as food stamps, housing vouchers, child-care subsidies and Medicaid. But if you get a promotion, or longer hours, or a second job, or otherwise start making more, these benefits will start to evaporate — and sometimes quite abruptly. You can think about this loss of benefits as a kind of extra tax on low-income people. …Americans at or just above the poverty line typically face marginal tax rates of 34 percent. That is, for every additional dollar they earn, they keep only 66 cents. …One in 10 families with earnings close to the poverty line faces a marginal tax rate of at least 65 percent, the CBO found. …You don’t need to be a hardcore conservative to see how this system might make working longer hours, or getting a better job, less attractive than it might otherwise be.

To understand what this means, the Illinois Policy Institute calculated how poor people in the state are trapped in dependency.

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. …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.

Agreeing that there’s a problem does not imply agreement about a solution.

Folks on the left think the solution to high implicit tax rates (i.e., the dependency trap) is to make benefits more widely available. In other words, don’t reduce handouts as income increases.

The other alternative is to make benefits less generous, which will simultaneously reduce implicit tax rates and encourage more work.

I’m sympathetic to the latter approach, but my view is that welfare programs should be designed and financed by state and local governments. We’re far more likely to see innovation as policy makers in different areas experiment with the best ways of preventing serious deprivation while also encouraging self-sufficiency.

I think we’ll find out that benefits should be lower, but maybe we’ll learn in certain cases that benefits should be expanded. But we won’t learn anything so long as there is a one-size-fits-all approach from Washington.

Let’s close with a political observation. A columnist for the New York Times is frustrated that many low-income voters are supporting Republicans because they see how their neighbors are being harmed by dependency.

Parts of the country that depend on the safety-net programs supported by Democrats are increasingly voting for Republicans who favor shredding that net. …The people in these communities who are voting Republican in larger proportions are those who are a notch or two up the economic ladder — the sheriff’s deputy, the teacher, the highway worker, the motel clerk, the gas station owner and the coal miner. And their growing allegiance to the Republicans is, in part, a reaction against what they perceive, among those below them on the economic ladder, as a growing dependency on the safety net, the most visible manifestation of downward mobility in their declining towns. …I’ve heard variations on this theme all over the country: people railing against the guy across the street who is collecting disability payments but is well enough to go fishing, the families using their food assistance to indulge in steaks.

It’s not my role to pontificate about politics, so I won’t address that part of the column. But I will say that I’ve also found that hostility to welfare is strongest among those who have first-hand knowledge of how dependency hurts people.

P.S. If you want evidence for why Washington should get out of the business of income redistribution, check out this visual depiction of the welfare state.

P.S. The Canadians can teach us some good lessons about welfare reform.

P.P.S. The Nordic nations also provide valuable lessons, at least from the don’t-do-this perspective.

P.P.P.S. Last but not least, there’s a Laffer-type relationship between welfare spending and poverty.

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One of the core principles of economics is that prices are determined by supply and demand. That includes the price of labor – i.e., the wages received by workers.

Another core principle is that taxes create distortions by reducing demand and supply. Which is why it’s not a good idea to impose high tax rates on behaviors that contribute to prosperity, such as work, saving, investment, and entrepreneurship.

That’s the theory. Now let’s consider some real-world implications of taxes on work.

Here are some excerpts from new research by the European Central Bank.

Several reforms can be enacted to reduce the unemployment rate in the euro area. Among them is a permanent reduction in the labour tax. Typically, a decrease in labour taxes reduces labour costs to employers and increases the net take-home pay of employees, positively impacting both labour demand and labour supply. Reducing taxes on labour can contribute to increase employment and activity rates in the EA, by increasing incentives to hire, to look for, and take up, work. …In this paper we contribute to the debate on those issues by evaluating the macroeconomic effects of a fiscal reform in the EA countries.

The study look at what happens with employment-related taxes are lowered at either the employer level or the employee level.

Permanently reducing labour tax rates paid by Home firms would have stimulating effects on economic activity and employment, and would permanently reduce the unemployment rate. The same is true when tax rates paid by Home households are reduced.

Here are some of the specific estimates of the positive impact of lower labor taxes at the firm level.

The tax rate is reduced by almost 2 p.p. (trough level). The reduction of labour taxes paid by firms reduces the gross wage bill of firms and hence increases the value of having a worker. Workers are able to obtain part of the increase in firms’ surplus in the bargaining process, which results in a real wage increase. Nevertheless, the wage increase is not sufficient to undo the increase in the value of having a worker for firms, which leads to an increase in labour demand through vacancy posting. The number of matches increases as well and, consistently, the probability of finding a job and that of filling a vacancy increases and decreases, respectively. Employment increases (and unemployment rate decreases) by roughly 0.3 p.p. after two years and 0.4 p.p. in the medium and in the long run, respectively. …Home GDP increases by 0.5% after two years. Both consumption and investment increase. Consumption increases because of households’ larger permanent income, associated with the increase in employment, hours and production. Investment increases because firms augment physical capital to accompany the rising employment.

I’ve combined some of the key results from Figures 3 and 4, all of which show the benefits over time of lower tax rates on work (the horizontal axis is quarters, so 20 quarters equals five years).

And here are the specific estimates of the good outcomes when labor tax are reduced at the household level.

Qualitatively, results are similarly expansionary as those obtained when reducing labour taxes paid by firms. Hours worked, employment, matches, and the probability of finding a job increase, while the probability of filling a vacancy decreases. …hours worked now increase by 0.4% (0.3% in the previous simulation), employment by almost 0.5% (0.35% in the previous simulation), while the unemployment rate falls by almost 0.5 p.p. (0.4 p.p. in the previous simulation). …Home GDP increases by around 0.7% after two years.

Once again, let’s look at some charts showing the benefits over time of lower tax rates on workers.

Interestingly, it appears that there are slightly better outcomes if labor taxes are reduced for workers rather than employers, but the wage numbers are better if the tax cuts take place at the business level.

I’ll take either approach, for what it’s worth.

Let’s close with one additional excerpt. The study incorporated the impact of government employment, which can have a very distorting effect on private employment given the excessive size of the bureaucracy and above-market compensation for bureaucrats.

…we allow for public sector employment and for the possibility of directed search between the private and public sector labour market… In fact, a proper assessment of the impact of the labour market reforms on private-sector employment should take into account that a common characteristic of the EA labour market is the important share of the public employment in total employment, which is, according to OECD (2015), around 20% in France, 15% in Spain, Italy and Portugal, and 13% in Germany. Thus, this component is important to understand the labour market dynamics in the EA, given also that, during a crisis period, public and private labour markets tend to be more inter-related (when the unemployment rate is high, the number of applicants to the public sector is larger).

P.S. I’m periodically asked whether I’m exaggerating when I assert that something (such as taxes distorting the supply and demand for labor) is a “core principle” in economics. But I don’t think left-leaning economists (and there are plenty) would disagree about taxes impacting supply and demand. But they presumably would quibble about the “elasticity” of supply and demand curves (in other words, how sensitive are people to changes in tax rates). Moreover, they surely would claim in some instances that any “deadweight loss” would be offset by supposed economic benefits of government spending (and pro-market people acknowledge that’s possible, at least when government is small). And, when push comes to shove, some folks on the left would openly argue that it’s okay to have less prosperity if there’s more equality.

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