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

The word justice is so abused that when something closer to the real thing shows up, it gets ignored or disparaged. Too many individuals are numb to arguments. The market is unjust at the lower ends of the wage scale. Edmund Phelps proposes a large wage subsidy—over $100 billion—to help low income workers, arguing that the contributions of lower income workers are colossally undervalued by power market considerations. Good moral values and a work ethic are not always sufficient to obtain decent wages.

According to power market theories, where wealth ownership allegedly equals wealth creation, professional athletes, liquor distributors, casino moguls—unproductive activities that move existing wealth rather than create it—should be held up as paragons of “productivity.” Clerks, daycare workers, and farm laborers should be excoriated for their lack of productivity. Low wage earners do vital work beneficial for third parties. No matter how creative and brilliant everyone is or is not, someone still must collect the trash. The moral benefits gained from low-paid workers far outweigh their power market earnings.

An increase in income has greater utility for lower income workers than for higher income workers. Another dollar for medicine is more valuable than another dollar for marble in a mansion. Phelps argues that wage subsidies provide incentives for lower-income individuals, making income more in proportion to moral attributes and contribution. Reciprocation and contribution develop autonomy, self-efficacy, justifiable pride, and reduce alienation--increasing moral and psychological development. Among the rewards of work are improvements in self-respect, self-reliance, mental stimulation and problem solving; not to mention helping to meet desires for being depended upon, believing you are useful.

Wage subsidies distinguish between contributors and non-contributors. Justice, meaning merit, matters more than equality. The working poor now seem to be thought of, if at all, in terms of compassion. Or, more likely, as losers. Merit rarely gets mentioned.

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

Currently existing subsidies are harmful types--corporate welfare, for example. 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 ignores social costs. Economic retribution patterns are bad and getting worse.

One hundred billion dollars to improve the lives of tens of millions may seem staggering, but we have an economy fast approaching ten trillion dollars. The top one percent alone earn nearly one trillion dollars per year. By 1990, reports the Census Bureau, forty-five percent of full-time full-year workers were earning less than $8.00 an hour (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 collapsed in the past quarter century, while taxes become increasingly regressive. If the poorest workers were forced to pay 15.3 percent work only payroll taxes generations ago, they might have tore down capitol buildings. No imperative exists for the working poor to pay payroll taxes. Our government demands virtue taxes rather than sin taxes. Those engaging in low wage work to support families get rewarded with regressive state, local, and payroll taxes while high-class prostitutes evade many taxes. A wage subsidy narrows the chasm between the moral worth of work and the current private rewards for work.

A wage subsidy, Phelps argues, would pay for itself in increased work force participation, increased tax revenues, lower unemployment, and lower social costs.

I will guess that a wage subsidy will have little impact on crime and similar problems, however, good reasons for wage subsidies exist.

Phelps knows a large wage subsidy would be unpopular with many powerful individuals. Among the attacks it would face are those Albert Hirschman says major new ideas face:

· It won’t work.

· It will lead to unintended consequences.

· It will hurt present accomplishments.

Those fighting wage subsidies say little about corporate welfare, home mortgage deductions, and pension transfers.

One counterargument claims there should be public jobs programs. But jobs programs are often busy work. Private sector work contributes more and better goods. The majority of social goods come into existence through child rearing efforts and private work force efforts. The autonomy and dignity workers is better served by the private sector. Plus public sector work costs more.

Another claims training should be a higher priority. But most jobs don’t require a large amount of training, especially at the lower ends. And they will not in the future despite what fear mongers in the education racket think. Most of the same everyday jobs must be done, no matter how much high-tech training we have. Research suggests that job-training programs accomplish little in general and have little impact on wages. Douglass J. Besharov and Karen N. Gardiner report elsewhere that three controlled studies of training programs that suggest 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 student 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 goodness.

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

Another line of thinking asserts the subsidy would increase inflation and tighten labor markets--a terrible counterargument. Tighter labor markets are good! They increase total employment and increase wages at the expense of the profits of wealthy individuals--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 wealth of rich individuals. 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.)

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

"free" market. Governments constantly intervene to help the wealthy.

The best counterargument, however, is the subsidy poorly targets individuals—the one counterargument that perhaps dooms wage subsidies to not being the best alternative. For more on the knockout counterargument, read True Security. Phelps claims about social factors are also not well supported, and 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, last updated June 27, 2009.

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