January 2002
Helping the Poor: What Doesn't Work
by Chris Sarlo
In my undergraduate days, a friend had a sociology professor who told his class that the way to solve the poverty problem was to print more money and give it to the poor. He reckoned, I would imagine, that money was inexpensive to produce and so this would be an almost costless way to eliminate poverty. Such genius is rare.
Muddled thinking about poverty and poverty policy continues. In particular, there are two proposals that have wide currency within the social welfare community yet have long been rejected by economists and government policy makers as naïve and counterproductive. They are classic examples of policies that are well-intended, but whose clearly negative consequences are either ignored or downplayed.
Proposal 1: Significantly Increase the Minimum Wage
The idea behind this proposal, presumably, is that if the state were to force firms to pay their lowest paid workers a "decent" wage, poverty amongst working people could be wiped out.
However, a significantly higher minimum wage will hurt the very people it intends to help. This happens because firms will tend to reduce employment of any input, including labour, if the cost of that input goes up. Evidence for this "disemployment effect" is overwhelming and consistent across jurisdictions.1 Those workers who are least skilled, least motivated, and most vulnerable will be hardest hit.
For a long time, economists have argued that it is far better for low-skilled workers to be actively engaged in work at a low wage than to be idle at a higher wage. The fact is that few workers remain at the minimum wage for very long. The practice in the foodservice industry, for example, is to progressively increase workers' wages as their productivity and experience improves. It would be rare indeed for someone to be stuck at a minimum wage for several years.
We also have to consider the potential impact of a sharp hike in minimum wages on the entire structure of earnings. In every industry, there are typical wage differentials between the different job categories. These gaps reflect different skill levels, responsibilities, risk, and other demands. If the minimum wage is increased, say, to the level of the next job category, it is reasonable to expect that there will be pressure to increase those wages as well, and to maintain the traditional wage differential between the two. This will continue up the line until the entire structure is affected. Failure to do that runs the risk of significant resentment, loss of morale, and ultimately union action.
If the entire structure of wages is higher, this will tend to slow down output, at least in the short run, as firms adjust to more expensive labour. As well, higher wages will tend to reduce our international competitiveness.
Proposal 2: Significantly Increase Social Assistance Benefits
This proposal suggests that our last-resort social program does not currently provide sufficient income to allow people to escape poverty. Thus, only a sharp increase in benefits will reduce the poverty of those on welfare.
There are several serious problems with this line of reasoning. First, it is not at all clear that people currently living on social assistance are poor. It clearly depends on how you define poverty. My own preferred definition, focussing on a "basic needs approach," leads to the conclusion that those on welfare are generally able to cover the basics and are not poor.
More important, I think, is the likely impact of the proposal on the recipients' incentive to work. Human nature suggests that if there is a program that pays people just about as much as they could earn by working, there will be a certain number who take up the offer. The more generous is welfare, the more people will be attracted into the program. We need to keep in mind that currently there are hundreds of thousands of households in Canada that are not on social assistance, but which have earnings from work in the immediate vicinity of (or below) the existing welfare income. Any significant increase in benefits will attract many more people to those benefits and make it even harder for existing recipients to refuse those benefits and remain in the labour force. This is by no means an insult to lower income people. It would happen at any income level. If you offer almost as much money to remain idle as to work, you will get takers.
The proposal is surely a well-intended and compassionate one. But its unplanned consequences include an expansion in the number of social assistance recipients together with benefit levels that make welfare more attractive and work less attractive. Furthermore, the working poor will also strongly resent such an increase. While welfare recipients may live somewhat better in the short term if their benefits are increased, they may well be worse off in the long term because they will be even more firmly trapped in dependency, and still have a low living standard. Many recipients who would have emerged from welfare and gone on to live a middle class life with its attendant comforts will not do so if the disincentive to work presented by higher benefit rates is strengthened.
Note
1 Sarlo, Christopher (2000). The Minimum Wage and Poverty: A Critical Evaluation. Report for the Canadian Restaurant and Foodservices Association (September). Available on the Internet at http://www.crfa.ca.
Chris Sarlo teaches economics at Nipissing University in North Bay, ON. He is the author of Poverty in Canada, published by The Fraser Institute.
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