So runs the narrative that for too long has been the underpinning of conservative policies towards the unemployed, especially since the steady decline in the workforce participation rate. For many conservatives, “entitlement” is most frequently used as the adjective to precede “cuts.” They are not entirely wrong, but there are entitlements, and then there are entitlements. There are those paid to the undeserving unemployed, who will always prefer benefits to work, just as there are benefits available to the undeserving rich, who are allowed to treat ordinary income as capital gains and deduct interest paid on mortgages on second homes.
Now, there is little doubt that there will always be some who prefer benefits to paychecks, and who will game any system in order to avoid the biblical injunction to earn their bread by the sweat of their brows or, in the updated version, at the risk of carpal tunnel syndrome. My advice to conservatives is “Live with it.” Better that than to try to shape policy for the mass of the unemployed to thwart the relatively few work-shy for whom no available wage is high enough and no benefit our decent society is prepared to tolerate is too low.
The undeserving unemployed will always be with us no matter the incentives available to them to train and find work. But their existence should not prevent a generous attitude towards the deserving unemployed, sidelined by forces beyond their control: an education system that leaves them unprepared to cope with a 21st-century economy; globalization that has destroyed jobs in America for the unskilled; easy money policies that have funded a recovery that adds to the wealth of the asset-owning while creating relatively few new jobs. These are the Americans on whom conservatives should lavish their policy-making ingenuity by creating a two-pronged program to woo workforce dropouts back into the labor market: Make work pay, and make jobs available. The first requires increasing the gap between what we pay people not to work, aka benefits, and what they can earn by working; the second requires that jobs be available to those with a renewed incentive to take those jobs.
Anyone familiar with art auctions knows that sellers have a reservation price, one below which they will withdraw their object from the sale. The same is true of even the most ambitious rational worker. If the wage offered, minus transportation, clothing, meals, and other costs of accepting employment is not sufficiently above the value of benefits, the worker will quite rationally prefer his benefits. Yes, for some there is the psychic reward and pride that comes with a paycheck, but it is not sensible to build policy on the assumption that such considerations would prompt the great mass of workers to take a reduction in income in order to participate in the labor market. Most will quite reasonably compare the gap between the income on offer in the workplace and the income generated from the benefits programs available to them, the latter constituting their reservation price.
At Harvard’s Kennedy School current and aspiring politicians, regulators, policymakers, and bureaucrats are taught that if they get the incentives right they will have done more to achieve their policy goals than regulatory oversight, auditing, and the other stuff of ever-growing government could accomplish. In the case of those who have dropped out of the workforce that would mean increasing income from work and, eventually but not until job-creating growth is restored, decreasing income from benefits.
Now, conservatives have always believed that benefits provide an incentive to stay home rather than look for work. But when it comes to increasing the value of work, for example by raising the minimum wage, conservatives’ faith in incentives is sorely tested. Yes, at some level an increase in the statutory minimum should reduce employers’ incentives to hire, and prompt them to seek labor-saving innovations, or raise prices for their products, thereby cutting into the demand for those products and for the workers that produce them. The CBO reckons that a move to the level Obama seeks would destroy 500,000 jobs. But it would also increase the incomes of more than 16.5 million workers. Factor in the inevitable unforeseen consequences and it is not at all clear that conservatives should automatically oppose an increase in the minimum wage. Surely a policy that increases both aggregate incomes and the gap between the value of work and the worker’s reservation price is worth another look.
As is the idea of ameliorating the job-destroying effect of an increase in the minimum wage by outright grants to employers preparing to lay off workers as a consequence of the increase. By way of a thought experiment: The increase from $7.25 per hour to $10.10, a raise the CBO guesses might cause the loss of 500,000 jobs, would add a bit less than $5,000 per year to the pay of a 30-hour-per-week worker. To induce employers to pay that rather than to cashier 500,000 workers would cost about $2.2 billion per year for, say, two years. Worth it?
Possibly a fatally flawed thought. But the basic idea, that we have to think in terms of trade-offs and rise above knee-jerk reactions to proposals such as raising the minimum wage, is not—at least not if conservatives want once again to be the source of ideas that keep market capitalism the system of choice. And be comforted by the fact that in thinking about this you are once again following the lead of Adam Smith:
Where wages are high . . . we shall always find the workmen more active, diligent, and expeditious, than where they are low. . . . No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. . . . That men in general should work better when they are ill fed than when they are well fed, when they are disheartened than when they are in good spirits, when they are frequently sick than when they are generally in good health, seems not very probable.
Of course, raising the minimum wage is not the only, and certainly not the most efficient way to increase the value of work. There is the Earned Income Tax Credit, which rebates employer and employee payroll taxes to low-wage workers, and which Eli Lehrer and Lori Sanders of the R Street Institute described in these pages (“Let’s Move,” February 10, 2014) as providing “virtually perfect incentives. . . . [I]t’s also entirely portable . . . [but] remains quite modest.” There is also a negative income tax. I leave it to others to devise ways to make work pay more, the funding to come from the savings in the benefits programs or from part two of a conservative back-to-work policy: accelerated growth.