Acton Institute Powerblog

Do Government Welfare Programs ‘Subsidize’ Low Wage Employers?

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walmart-lowwagesAs Elise pointed out earlier today, economist Donald Boudreaux completely eviscerates former Labor Secretary Robert Reich’s call to raise the federal minimum wage to $15 an hour. As Boudreaux says, “Reich’s video is infected, from start to finish, with too many other errors to count.”

But Boudreaux also wrote a letter to Reich countering the economically ignorant (though increasingly popular!) claim that “we subsidize low wage employers” like Wal-Mart, McDonald’s, and almost every mom-and-pop business in America through government welfare programs such as food stamps, Medicaid, and housing assistance. As Boudreaux says to Reich:

Basic economic reasoning reveals your argument to be backwards. Welfare payments of the sort that you mention make work a relatively less attractive option for welfare recipients and, thus, reduce the labor supply. One consequence is that wages paid by employers to their low-skilled workers are raised (and not, contrary to your mistaken suggestion, lowered). Thus, far from being subsidized by most government welfare programs, Wal-Mart, McDonald’s, and other employers of many low-wage workers are harmed by them.

Don’t believe me? Here’s Arindrajit Dube, one of the most prominent economists today who favors raising the minimum wage: “[M]eans tested public assistance programs are not tied to work, and we should not expect them to lower wages. Let’s take food stamps, which are available to eligible families whether or not a family member works or not. Indeed, when people are not working, they are more likely to be eligible for food stamps since their family incomes will be lower. Therefore, SNAP is likely to raise, and not lower a worker’s reservation wages – the fallback position if she loses her job. This will tend to contract labor supply (or improve a worker’s bargaining position), putting an upward pressure on the wage.”

Your failure to grasp even the most fundamental of economic principles makes your arguments for a higher minimum wage especially dubious.

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Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

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