Does the government subsidize low-wage employers?

By Gary Burtless of Brookings. Excerpts:

"Three months ago a California think tank published a tabulation of the federal and state dollars that boost the incomes of Americans who work but earn so little they qualify for government aid. The authors of the report as well as many readers seemed shocked by cost of the aid. Berkeley’s Center for Labor Research and Education estimated that the national and state governments paid out $153 billion in 2013 to finance health benefits, food stamps, and cash assistance to people in families containing a breadwinner who works at least part time and at least half the year.

A remarkable feature of the reaction to the report is that many readers interpreted the government aid dollars to represent a subsidy to low-wage employers (for example, here, here, and here). According to this view, government assistance to low-income families constitutes a handout to Walmart, McDonalds, and other low-wage employers. The assistance allows these companies to pay their workers lower wages than would be possible in the absence of the government aid.

For the majority of programs analyzed by the Berkeley researchers, this interpretation of government assistance payments is flatly wrong. Instead of subsidizing low-wage employers, most assistance programs reduce the availability of low-skill adults who are willing to work for low pay and lousy benefits. By shrinking the pool of workers willing to take the worst jobs, the programs tend to push up rather than push down wages at the bottom of the pay scale. Low-wage employers do not receive an indirect subsidy from the programs. Many must pay somewhat higher wages or recruit more intensively to fill their job vacancies.

There are two important exceptions to this generalization: the Earned Income Tax Credit (EITC) and child care subsidies targeted on working parents who earn low incomes. Because benefits under these programs are only payable to low-income families containing a parent who is gainfully employed, this kind of government subsidy encourages adults in eligible families to enter or remain in the job market rather than to drop out of it. By boosting the supply of potential low-wage workers, the two programs can put downward pressure on pay, indirectly benefiting employers who depend on less-skilled workers. Even in these cases, however, the main effect of the aid is to lift the net incomes of breadwinners earning low pay."

"Most careful analysis of the impact of this kind of means-tested program concludes the programs discourage work. The availability of health insurance, food coupons, and cash assistance when potential breadwinners do not work means that paid employment is less necessary. The fact that government benefits are reduced when the breadwinner’s earnings rise means that work is financially less rewarding. Both these effects tend to reduce, at least modestly, the amount of paid work that eligible breadwinners are willing to do. I do not argue the impact is large or that it affects most adults who are potentially eligible to collect means-tested benefits. On balance, however, benefit programs offering more generous payments to people with zero earnings than to people with comfortable incomes tend to reduce the supply of workers who are willing to accept very low pay."

"The public programs singled out in the Berkeley report are aimed at improving the health care access, nutrition, and net incomes of the nation’s most disadvantaged families. Three of the programs provide more assistance to nonworking Americans and their dependents than to families containing a working breadwinner. It is hard to see how this kind of program can be said to provide a subsidy to low-wage employers. Two programs that restrict benefit payments to working breadwinners—EITC and daycare subsidies—surely succeed in improving the net incomes of working but struggling parents. Indirectly the two programs increase the supply of low-wage workers, putting some downward pressure on wages. Labeling these programs as “subsidies” to low-wage employers has some merit, but it fundamentally misrepresents the distribution of benefits conferred by the programs. The main effect of the subsidies is to lift the net incomes of the working families that receive them."