Welfare programs reduce the supply of labor and, thus, push wages up

See If Economic Ignorance Were a Natural Resource, Our World Would Be Paradise by Don Boudreaux.

Here’s a letter to a new correspondent who writes that he is “impressed” by a recent letter in the Wall Street Journal by a Mr. Scot Phelps of New York.  (In contrast, I was not impressed by Mr. Phelps’s letter.)

"Mr. Chris Indovino

Mr. Indovino:

I did indeed read Scot Phelps’s Wall Street Journal letter in which he argues that government subsidization of low-skilled workers’ “housing, food, medical care, and transportation” enables employers of such workers to pay them less than their “true” value.  I didn’t respond to it because I had nothing to say about such an economically unmoored argument that I’ve not said in the past.  (See also this EconLog post by my colleague Bryan Caplan.)  The central economic point is this: the welfare programs to which Mr. Phelps alludes (with the possible exception of transportation subsidies) reduce the supply of labor and, thus, push wages up.  Far from employers being subsidized by such welfare programs, employers of workers who receive these government benefits are obliged, as a result, to pay wages that are made artificially high.

But to show just how deeply confused this Mr. Phelps is, let’s pretend that he’s correct to insist that welfare programs artificially reduce wages.  Mr. Phelps then asserts that “Failure to pay a living wage gives consumers artificially low prices and increases corporate profits.”  Because nearly all employers of low-skilled workers operate in intensely competitive industries such as retail and food service, workers’ artificially low wages would indeed result in artificially low prices for consumer goods, but not in increased corporate profits.  The ability to hire workers at artificially low wages would attract new entrants into these markets, as well as cause existing firms to expand their outputs, until the rate of profit earned by employers of these workers is no higher than it would be if wages were higher.  That Mr. Phelps is oblivious to this reality is sufficient reason to dismiss his economic analysis.

Sincerely,

Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030"