Cropped BHI

Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise

by Edmund S. Phelps
(Harvard University Press, 1997)
Reviewed by Frank Conte, BHI Publications Editor

from NewsLink, Vol. 2, No. 1, Fall 1997


"Work is at the center of a normal life," writes Edmund S. Phelps, who sounds more like a sociologist than an eminent economist. Echoing Alfred Marshall, Phelps, in his new book, Rewarding Work, also reminds us that work builds character, gives us a sense of place, employs our mental faculties and establishes a nearly inseparable link to family and community life. No matter how routine or how boring, work is far better than the alternative of nonwork and devilish idleness. Everyone should participate in enriching work. What's needed, says Phelps, is sound policy.

Workers with a college education can still find success in a dynamic, information-driven economy and firms continue to find ways to increase their productivity and opportunities for advancement. But a bleak picture remains for those on the lower rung. It is a picture of the dramatic decline in gainful employment of low-wage earners. Among white men, the average annual earnings of high school graduates fell by 3.3% between the mid-1960s and the mid-1980s, while those of high school dropouts fell by 17.1%. The unemployment rate of adult high school graduates rose to 7% in 1994. The statistics are not any better for other segments of the population.

The work of low-wage earners across gender and race has been devalued as a result not only of the loss of manufacturing jobs but also because of a welfare system that compounds the problem with disincentives to work.

Phelps counts the cost of a tattered social fabric when low-wage earners drift from the median wage. An underemployed underclass not only deprives an economy of the fruits of its labor, but also pushes public spending to intolerable levels. For example, expenditures for police protection and corrections have been running at about 6% of the total government purchases; 1% of national income. And the administration of criminal justice nearly doubled in the 1980s. The lower crime rates we face today, the product of that extra crime-fighting spending, may be just a temporary anomaly.

Such are the disquieting side effects of a modern economy that is out of reach for low-wager earners. Phelps believes current solutions are oversold. One party believes that faster economic growth will improve the rewards for everyone; the other says more government help, particularly in education, is the solution. One party believes in curtailing social insurance programs; the other seeks perpetually to increase the minimum wage. One party lodges its complaint on the shortcomings of culture (wrongheaded, says Phelps, because culture doesn't explain differences in wage rates); the other pins blame on income inequality. (Phelps believes the egalitarian cure of income redistribution and public sector employment is far worse than the sickness.)

Phelps' solution consists of an employer subsidy program that would keep the labor costs of low wages to a minimum and thereby more attractive.

Like the hedgehog who has one big idea (in contrast to the fox who knows many different things), Phelps builds his single-minded but compelling organizing principle around continuing tax credits to private enterprises. Such credits are needed, in part, because of the heavy hand of taxation upon labor and in part because low-wage earners aren't worth the cost to employers.

He writes, "Low-wage employment subsidies, their imperfections notwithstanding, are the most effective instrument we have available to re-create lost opportunities for work and self-support, to restore inclusion and cohesion, and to reclaim responsibility for oneself and others."

It would work as follows: A firm that pays an unskilled employee $4 per hour would receive a subsidy, to wit, a matching grant of $3 per hour from the government. This would raise the gross wage rate to $7 for the employee. On a similar schedule, if an employer pays an hourly rate of $6, he or she would receive a subsidy of $1.65 which would bring the gross wage to $7.65, and so on. The subsidy would cut off after $12, at which an employer would earn only six cents in subsidy. Under Phelps' plan, the subsidies would be applied against payroll and profit tax liabilities.

The purpose of the wage subsidy is to draw unskilled laborers into the work force, expand their job opportunities with new work incentives, and, above all, lift the living wage of the unskilled. Phelps is convinced that his medicine is worth the cost of approximately $125 billion. It would require, among other tax measures, the elimination of the Earned Income Tax Credit and federal training programs that do not elevate the working poor's income.

In the long term, this subsidy would produce a net positive gain for taxpayers who would see less welfare and less spending on the criminal justice system. One of the direct benefits of the employment subsidy is that it would "shrink welfare's 'market share'."

Both conservatives and liberals may balk at the subsidy's high price tag. However, Phelps' groundwork is very much in accord with classical liberal thinking. Phelps thinks those who place equality before everything else fail to distinguish the contributions of those individuals who create wealth in a free-market society. His wage subsidy idea falls within the framework of the American tradition of reward rather than entitlement. He thinks his idea of subsidies for doing something is preferable to the provision of mere transfers from worker to nonworker. Rewarding Work is a solid argument and a challenge to failed policies.

NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. 1996-2005. All rights reserved.

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