For most of America, it’s been the economic recovery that wasn’t. The most prosperous fifth of the nation’s ZIP codes account for all job growth since 2007, according to the Economic Innovation Group’s Distressed Communities Index; the rest of the country has experienced a net employment loss. Just five counties account for the entire gain in business establishments; the rest of the country has fewer than before the recession hit.
We need to spread prosperity more widely, but we have little experience doing that well. Government efforts to spur development in a particular place tend to falter, with resources steered by the political process toward boondoggles that do little to buttress a region’s economic vitality. Most support ends up coming from our safety net’s transfer payments, which help to meet people’s immediate needs but perversely weaken the labor market in the process.
There’s a better way, one with bipartisan pedigree, mechanisms for implementation in place and funding available. It’s called a “wage subsidy.”
The principle behind a wage subsidy is simple enough: If society recognizes the value of work and truly wants to promote it, we should be prepared to help pay for it. When you subsidize something, you get more of it. Subsidizing work makes jobs pay more than they otherwise would, attracting people from the sidelines into the labor force. Some of the subsidy’s value accrues to employers, too, who will find it more attractive to create jobs for less-skilled workers. The result is higher employment levels at higher wages, with enormous benefits for not only struggling households, but also struggling communities.
We subsidize work on a limited scale today, through a program called the Earned Income Tax Credit that makes low-income households eligible for substantial payments during tax season each year—more than $5,000 for some families. But the EITC’s annual, lump-sum payments have serious limitations: They align poorly with the financial needs of people living paycheck to paycheck. They don’t make clear the full earnings that workers can expect from low-wage jobs. And as structured today, the benefit goes almost entirely to households with children, even though drawing young, single workers into the labor force should be a top priority.
A properly designed wage subsidy would operate much like the current payroll tax, but in reverse—instead of deducting money from each paycheck based on how much the worker has earned, the government would put money in. The amount would be calibrated to the worker’s hourly wage, so someone earning $9 per hour might get a $3-per-hour subsidy; someone earning $13 per hour might get an extra $1. Once a worker’s market wage reached $15 per hour, the subsidy would cease.
The critical distinction between a wage subsidy and traditional approaches to supporting struggling households and communities is its direct attachment to work. America already transfers more than $1 trillion annually to lower-income households, a total that has surged four-fold since the 1970s even as median wages stagnated. But nearly all that support is provided without reference to work, and in fact usually discourages work. That’s because increases in earned income reduce benefits, which makes the decision to try to earn a living seem a losing proposition for recipients. With a wage subsidy, by contrast, the incentive is reversed: taking a low-wage job is the way to become eligible, and working more is the way to receive a larger benefit.
A parallel problem, and solution, exists for depressed places. Local economies suffering from deindustrialization now rely on the safety net to stay afloat, which means in practice that they “export need.” In other words, instead of making things that others want in return for the goods and services they want from the wider world, they rely on their own lack of earned income to attract transfer payments. Taxpayer largesse supplies them with the things they want in return for nothing at all. The thriving occupational therapy office in an otherwise vacant plaza becomes the town’s exporter, selling to the nation its care of local residents on disability. Using similar logic, the U.S. Department of Agriculture promotes food stamp enrollment as a “win-win for local retailers and communities. Each $5 in new SNAP benefits generates almost twice that amount in economic activity for the community.” Add in Medicare and Social Security, and in vast swaths of the country a third or even a half of all personal income arrives via government benefits.
As with people, a wage subsidy reverses this dynamic for places. Subsidy payments are also transfers, of course, but they arrive in paychecks attached to the community’s productive workers. Rather than rely on people not working to attract dollars from Washington, the community’s workers become its engine of prosperity—and all jobs within the community can be ones that generate resources. To be sure, an economy in which all communities support themselves without transfers is the goal; but until we reach it, a wage subsidy represents the best substitute. Instead of suggesting food-stamp enrollment as the way to help your local economy, the government can suggest getting a job—any job.
Some wage-subsidy proposals have a more explicitly “place-based” orientation, targeting support to depressed regions. This goes too far. For one thing, the politics of deciding who should be eligible would be a nightmare. For another, low-wage workers struggling to make ends meet are a pervasive feature of our national economy, and they deserve this form of support wherever they live. By setting a standard subsidy calculation nationwide, most of the subsidy will already flow to those places that have the weakest labor markets and lowest wage structures.
Certainly, a nationwide subsidy costs more than a targeted one, but America’s ever-expanding safety net already contains the resources to fund the program—resources that are being spent less effectively, in ways that deliver less value to recipients and often discourage work in the process. Without disrupting our support for people who cannot work, we could shift assistance for people who can work—or, indeed, already are working—toward this new form that encourages work and delivers cash in each paycheck to those who do work. Substantial funding would come from replacing the existing Earned Income Tax Credit. Programs like food stamps and disability could revert to their pre-recession scales. Some Medicaid spending, which yields appallingly low returns for recipients, could likewise be redirected. Best of all, as the subsidy moves people back into the workforce, their need for government transfers will decline.
The principle of supporting work is a bipartisan one, but Republicans resist the creation of yet more programs, while Democrats reject any shifting of funds from existing programs as “cuts”—even when the resources would still flow toward low-income households, but in a more effective manner. Both sides, however, can achieve their goals through a wage subsidy. It would make what we already spend go further, strengthen labor markets, reward work and move more families and communities toward self-sufficiency.
– Oren Cass is a senior fellow at the Manhattan Institute and author of the new book “The Once and Future Worker: A Vision for the Renewal of Work in America.”