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Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise by Edmund S. Phelps

The word justice has been so abused that when something closer to the real thing shows up, it gets ignored or disparaged. Too many people are numb to arguments. The market is at its most unjust at the lower ends of the wage scale. Edmund Phelps argues for a large wage subsidy—over $100 billion—to help low income workers. He argues that their contributions are colossally undervalued by power market considerations. The present connection between contribution and income is closer to half baked than to good. Good social values and a good work ethic are not always sufficient to obtain a decent wage.

According to power market pundits, strippers, professional athletes, liquor distributors, casino moguls, video game designers—unproductive activities that move existing wealth rather than create it—should be held up as paragons of “productivity” Clerks, daycare workers, and fruit harvesters and so on should be excoriated for their lack of productivity. Low wage earners do work that is vital for the economy and beneficial for third parties. No matter how creative and brilliant everyone is, someone still has to pick up the trash. The moral and social benefits gained from low-paid workers far outweigh their power market value.

These workers deserve better, and doing so would lead to better overall consequences. An increase in income has greater utility for lower income workers than it does for higher income workers. Another dollar for medicine is more valuable than another dollar for marble in a mansion. Phelps argues that wage subsidies improve the incentives on lower-income individuals. They make income more in proportion to moral attributes and contribution. Reciprocation and contribution develop autonomy, social skills, self-efficacy, justifiable pride and reduce alienation. They increase moral and psychological development. Among the important rewards of work are improvements in self-respect, self-efficacy, self-regulation, self-reliance, mental stimulation and problem solving; not to mention helping meet desires for being depended upon, believing one is useful, and teaching important lessons,

Wage subsidies distinguish between contributors to society and noncontributors. Justice, meaning desert, matters more than equality. The working poor now seem to be considered, if at all, in terms of compassion and social benefits. Merit hardly gets mentioned.

Few people realize that public spending has shifted from payments for doing things (subsidies) to payments for having specific attributes (transfers). Transfer payments now take over 30 percent of earnings, almost three times the percentage in 1960.

The subsidies that do currently exist are harmful types such a corporate welfare. Idleness rewarding transfers cost over two trillion dollars a year in direct economic costs and at least one or two trillion more in economic opportunity losses. And that is not including social costs. The retribution patterns of the economy are bad and getting worse.

One hundred billion dollars that would improve the lives of tens of millions may seem staggering, but we have an economy that is fast approaching ten trillion dollars. The top one percent alone earn nearly one trillion dollars a year. According to the Census Bureau, by 1990 forty-five percent of full-time full-year workers were earning less than $8.00 an hour in wages (in 1990 dollars, I think.) About two million adults in official poverty work year round, full time. Millions more are low income but above the official poverty level. Median and under wages for young men have almost collapsed in the past quarter century, while taxes have become increasingly regressive. If the poorest workers were forced to pay 15.3 percent work only tax generations ago, they would have tore down capitol buildings. There is no imperative for the working poor to pay payroll taxes. There is only the tradition of a bad policy. Our government is paid for with virtue taxes rather than sin taxes. Those who engage in low wage work to support their families get rewarded with loads of state, local and payroll taxes while prostitutes with six figure incomes evade all sorts of taxes. A wage subsidy will narrow the chasm between the social worth of work and the current private rewards for work.

Phelps argues that a wage subsidy would completely pay for itself in increased work force participation, increased tax revenues, lower unemployment and lower social costs. I do not think it will pay for itself and it might not lower “official” unemployment because monetary policies primarily control the unemployment rate, though it probably will increase the total size of the work force and reduce unemployment that way.

I will guess that a wage subsidy will have little impact on crime and similar problems, but there are plenty of good reasons for a wage subsidy.

Phelps knows that a large wage subsidy is unpopular. Among the attacks it will face are those Albert Hirschman says major new ideas constantly face, no matter how good the ideas are:

· It won’t work.

· It will lead to unintended consequences.

· It will hurt present accomplishments.

The same people who would fight a wage subsidy almost to death say little about corporate welfare, home mortgage deductions, pension transfers, and so on.

One counterargument claims that a there should be a public jobs program. But jobs programs are busy work. Private sector work contributes more and better goods. The overwhelming majority of social goods come into existence through childrearing efforts and private work force efforts. The autonomy and dignity of the worker is better served by the private sector. Finds mistakes in other methods: Public sector jobs are alienating and unproductive. Plus public sector work would cost more.

Another claims that training should be a higher priority. But most jobs don’t require a large amount of training, especially at the lower ends. And they won’t in the future despite what fear mongers in the education racket think. A large amount of research suggests that job-training programs accomplish little in general and have little impact on wages. Douglass J. Besharov and Karen N. Gardiner elsewhere report three controlled studies of training programs that suggest that non-participants in a control group are only one to five percent more likely to be on welfare than participants in job training programs. Job skills training is best decided by employers and employees, not politicians. Training programs make debt payments larger than they would otherwise be. They reduce the amount of capital available for private investments. They waste citizens' time and money. Job training gives the impression of caring. It fits in with ideals about education, but it does not match ideals of truth and goodness.

One decent counterargument is that the subsidy would distort employer decisions. The counterargument to that is that the employee is the primary beneficiary of the subsidy, not the employer. Distortions would be minor compared to the benefits of the subsidy.

Another line of thinking claims that the subsidy would increase inflation and tighten labor markets, a terrible counterargument. Tighter labor markets are good! They increase the total employment and increase wages at the expense of the profits of rich people, which is the real reason rich people loath tight labor markets. “Labor markets are too tight” is a euphemism for unemployment is too low to serve the desires of rich people. Tighter labor markets—the real free markets!—force employers to compete for employees rather than employees engaging in mutually destructive competitions with each other. In any event monetary and fiscal policies primarily control inflation and labor markets. A loosening due to greater incentives to work and to work more hours will offset any minor tightening of labor markets. As for inflation, a slight increase in inflation would no harm.

Some claim that one should never intervene in power markets, but fiscal and monetary policies are interventions into the

"free" market, often to help wealthy elites at the expense of others such as when The Fed increases interest rates.

The best counterargument is that the subsidy is inadequately targeted—the one counterargument that dooms wage subsidies to not being the best alternative. For more on the knockout counterargument read True Security. The author's claims about social factors are also not well supported. His method of funding the wage subsidy—with a 2.5 percent increase in the payroll tax—is also a bad idea. Recommended. 208p 1999 (H)

— Book review by J.T. Fournier.

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