SOLUTIONS: Ideas for building a new economy
VOL. 1, NUMBER 1 July 1996

-- Nathan Newman, newman@socrates.berkeley.edu

The current debate on welfare is stale, tired and, ultimately,
missing the economic point.

Let's be clear what welfare is and is not. Welfare is not charity.
Welfare is a system of payments made to the poor not to take any job if
its pay is so low that it underbids wages for those who have jobs. When
linked to other policies like the minimum wage, welfare is (and should be
seen as) an economic tool by society to keep wages high.

Progressives need to stop appealing just to the compassion of the
public in defending welfare and start playing on their self-interest. The
economic reality is that decent wages for "the rest of us" depend on
having a decent welfare system. Without that welfare system, all wages go
down under a flood of workers desperate to take jobs at any wage in order
to keep their families from starving.

Conservatives try to argue that even if kicking people off welfare
causes some erosion in wages, it's cheaper than increasing the taxes
needed to pay people on welfare. The obvious response is to point out how
small a portion of the federal budget is taken up by programs like AFDC
and other payments to the non-working poor. Out of a $1.6 trillion
federal budget, only $19 billion goes to AFDC, just over 1% of every
federal dollar spent.

But that's a defensive argument and progressives have to get off the
defense and on the offense. We have to sketch exactly how supporting the
welfare system, even expanding it, can be used to reverse the wage erosion
workers have faced in the last two decades.

Let's start with the minimum wage. Conservatives use the fear of
unemployment to oppose it. In the recent debate on the minimum wage,
opponents of raising the minimum wage from $4.25 to $5.15 per hour have
argued that employers would lay off hundreds of thousands of workers
(roughly 1-2% of minimum wage workers in their estimates) if forced to
raise wages for the rest. Now, a number of solid economic studies, most
recently by economists David Card and Alan Krueger, have shown that modest
raises in the minimum wage actually have no effect on employment.

But, for the sake of argument, let's ignore those economic studies
and target our economic program at those who might buy conservative
arguments that 1-2% of minimum wage jobs will be lost if the minimum wage
is raised. Even with that assumption, if we create a strong welfare
system, everyone, including the taxpayer, gains from the increase in the
minimum wage. Follow the math on this and you'll have the strongest
argument in countering conservatives attacks on both welfare and the
minimum wage.

Buying the conservatives' assumptions of 2% unemployment, it means
that for every 100 minimum wage workers initially making $4.25 per hour,
we will end up with 98 workers making the new minimum wage of $5.15 per
hour and 2 workers unemployed.

Breaking that down by hour, week and year, for every 100 workers
who initially make $4.25 per hour ($170 per 40-hr week, $8840 per year),
the total combined wages of all 98 workers who stay employed initially
equals: $866,320 per year ($8840 per year x 98 workers).

After the raise in the minimum wage to $5.15 per hour ($206 per
week, $10,712 per year), total wages will increase to $1,049,776 per year
($10,712 per year x 98 workers). Those 98 workers will see an individual
gain of $1872 per year in wages and an com bined gain of $165,776 in

If the two newly unemployed people are supported with welfare
payments equal to their previous yearly wage of $8840 (much more generous
than present welfare systems), the total cost will be $17,680--far less
than the $165,776 net gain in wages for the other 98 workers. In fact,
that $17,680 is far less than what the federal government would receive in
increased income and payroll taxes on those increased wages.

So even using the conservatives' own estimates of job loss, the
minimum wage with a strong welfare system can be used to increase wages
while protecting the incomes of those left unemployed.

To translate this into the slightly messier real numbers of the
overall US economy, there are 12.3 million workers who make less than the
proposed new minimum wage of $5.15 per hour. They make an average of
$4.67 per hour, so if 98% of those workers have their wages increased to
the new minimum wage, the aggregate increase in wages will be $12 billion
yearly. This is far more than any welfare costs that might be needed for
income and training funds if any workers are left unemployed.

These numbers have all assumed the rather miserly increase in the
minimum wage proposed by Clinton. If instead of $5.15 per hour, we
increased the minimum wage another dollar to $6.15 per hour (about the
inflation-adjusted level back in 1969), we can see even more dramatic

There are 20.8 million Americans making less than $6.15 per hour. If
all of these workers (with an average wage of $5.10 per hour) had their
wages increased to a $6.15 per hour minimum wage, the net increase in
wages would be $45.6 billion annually. Even if we assumed a worst-case
assumption of 10% of those workers were left unemployed, this would still
leave a potential $40 billion for welfare and retraining funds--an amount
DOUBLE the entire present AFDC budget.

In fact, all these numbers understate the overall gains in wages,
since it ignores the effect of the minimum wage on higher wage workers.
But the reality is that the mass of workers making a bit more than any new
minimum wage are able to demand a wage increase to maintain a "spread"
between them and less skilled workers now making what they used to make.

So where are these increased wages coming from? Some of it comes
from increased growth due to higher consumer demand, some from increased
costs passed onto consumers, but in the end, in highly competitive markets
employing minimum wage workers, the largest chunk come out of the profits
and executive compensation of corporate stockholders. And there's the
reason why both welfare payments and the minimum wage are opposed so
vociferously by corporations and their legislative allies.

It's no coincidence that conservatives support both eliminating
welfare payments and lowering the minimum wage. Moving people from
welfare into the workplace drives down wages, and the last thing
conservatives (supported massively by low-wage employers) want is to have
the government prevent wages from falling. And by keeping welfare payments
low or non-existent, they can create fear of unemployment from raising the
minimum wage or supporting other policies to raise wages.

Of course, there are ways to improve welfare, including providing
work instead of income payments, but that work has to be at a living wage
that, instead of driving down wages, helps to bolster wages in society
while delivering services that the market fails to provide.

Look at the debate over Wisconsin's proposed welfare plan, a plan to
end welfare for everyone in the state and replace it with work
requirements. Where is the headline-grabbing debate over the fact that
this flood of new additions to the workforce will be making less than
minimum wage and even replacing workers who previously made much higher

The enthusiasm for welfare "reform" would chill significantly if
people recognized that shredding the safety net also meant shredding their
own wages. If the Wisconsin-style plan was extended nationally, the
effects would trash wages across the coun try. Even as welfare payments
have declined in the last two decades, average hourly wages have dropped
by over 10% and wages for less-skilled job have fallen even more. Imagine
all four million plus adult recipients of AFDC being dumped in the labor
market tomorrow on top of present unemployment, or even gradually over a
year or two.

The key thing for progressives to argue is that unless the policy
is to spend MORE to provide real jobs for all, it's cheaper for working
families to pay people not to work than to force them to work at wages
that drive down pay for all of us.

SOLUTIONS: a twice-monthly electronic newsletter promoting policy ideas
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With the Gingrich Congress's assault on everything from social programs to
unions, progressives need to begin promoting positive alternatives to
address the economic and social problems facing the multi-racial community
of working families in the new economy.

SOLUTIONS is our modest effort to contribute to this debate. If you have
comments or ideas, please feel free to write us at pcomm@ix.netcom.com

SOLUTIONS is produced by Nathan Newman and Anders Schneiderman of
Progressive Communications.