It is generally thought (correctly I suspect) that welfare is a poor way to help the poor as it robs them of the dignity of work. Something like welfare is needed to keep the poor from starving, and the something that’s generally chosen in a living wage — a minimum wage set high enough that even a minimally skilled worker should be able to support a family of 4. This may be better than welfare, but I’d like to propose something better still — and a way to pay for it — a negative tax.

I suspect that a high minimum wage hurts the poor and middle class in a few ways. For one, by flattening the wage structure, it hurts the ego of higher skilled workers and reduces their incentive to improve. A senior worker should make more than an unskilled beginner, but a high minimum wage dampens this. What’s more, a high minimum wage cuts the lower rungs off of the employment ladder, making it harder for young folks, and unskilled folks to be productively employed. There may be some worthwhile minimum, but not everyone lives independently (or should) and not every job deserves to support a family of four, if only because not every unskilled worker is supporting a family of four. Many minimum wage earners are living at home or are heads of double-income couples, and only a few have the skills to justify the wage on a value added basis. A high minimum wage is thus needlessly costly for many workers. People accept the cost because it’s borne by the company (and companies are seen as evil). But passing the burden has limits, and a high minimum wage creates high unemployment in low skill areas, as employees are reluctant to pay a lot for low skill work. In Detroit before bankruptcy, the living wage was set so high that companies could not compete. Many went bankrupt and the others hired so selectively that the unskilled were basically unemployable. Even the city couldn’t pay the wage and its bills.

Even with the highest minimum wage, there is always a need for welfare, as some workers will be unemployable — because of disability, because of lack of skill, or from an ingrained desire to not work. The punishments a community can mete out are limited, and sooner or later some communities stop working and stop learning as they see no advantage.

The difficulties of taking care of the genuinely needy and disabled while the lazy and unskilled has gotten even some communist to reconsider wealth as a motivator. The Chinese have come to realize that workers work better at all levels if there is a financial reward to experience and skill at all levels. But that still leaves the question of who should pay to help those in need and how.  Currently the welfare system only helps the disabled and the “looking” unemployed, but I suspect they should do more replacing some of the burden that our minimum wage laws places on the employers of unskilled labor. But I suspect the payment formula should be such that the worker ends up richer for every additional hour of work. That is, each dollar earned by a welfare recipient should result in less than one dollar reduction in welfare payment. Welfare would thus be set up as a negative tax that would continue to all levels of salary and need so that there is no sudden jump when the worker suddenly starts having to pay taxes. The current and proposed tax / welfare structure is shown below:

Currently (black) someone’s welfare check decreases by $1 for each dollar earned, then he enters a stage of no tax — one keeps all he earns, and then a graduated tax. I propose a system of negative tax (red) so each dollar earned adds real income.

The system I propose (red line) would treat identically someone who is  incapacitated as someone who decided not to work, or to work at a job that paid $0/hr (e.g. working for a church). In the current system treats them differently, but there seems to be so much law and case-work and phony doctor reports involved in getting around it all that it hardly seems worth it. I’d use money as the sole motivator (all theoretical, and it may not work, but hang with me for now).

In the proposed system, a person who does not work would get some minimal income based on family need (there is still some need for case workers). If they are employed the employer would not have to pay minimum wage (or there would be a low minimum wage — $3/hr) but the employer would have to report the income and deduct, for every dollar earned some fraction in tax — 40¢ say. The net result would be that the amount of government subsidy received by the worker (disabled or not) would decrease by, for 40¢ for every dollar earned. At some salary the worker would discover that he/she was paying net tax and no longer receiving anything from the state. With this system, there is always an incentive to work more hours or develop more skills. If the minimum wage were removed too, there would be no penalty to hiring a completely unskilled worker.

At this point you may ask where the extra money will come from. In the long run, I hope the benefit comes from the reduced welfare rolls, but in the short-term, let me suggest tariffs. Tariffs can raise income and promote on-shore production. Up until 1900 or so, they were the main source of revenue for the USA. As an experiment, to see if this system works, it could be applied to enterprise zones, e.g. in Detroit.

R. E. Buxbaum, June 27, 2014. I worked out the math for this while daydreaming in an economics lecture. It strikes me as bizarre, by the way, that can contract with someone for barter, e.g. to help you move for a pizza, but you can’t contract for less than the minimum wage $7.45/hr. If you hire the worker for less you can go to jail. In Canada they have something even more bizarre, equal wages for equal skills — a cook and a manager must earn the same, independent of how well the cook cooks. No wonder violent crime is higher in Canada.