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Ethos Perspectives
Making Work Pay
The conventional thinking on welfare has
undergone significant change in the last decade or so. As
welfare rolls increased and the fiscal costs became unbearable,
many of the Western countries have responded by radically
reforming their welfare states. Welfare reform in the US,
UK, Australia and many other OECD countries has focused not
on measures to cut benefits, but to link benefits more closely
to the effort put in by recipients in training, job search
and community jobs. These measures reflect a new consensus
in welfare policy—that of mutual obligation—emphasising
not just the responsibilities of the state, but also those
of the recipient. In many US states, welfare reform was characterised
by higher benefits accompanied by stricter demands on recipients,
reflecting a “pay more, demand more” philosophy.
There has also been a deliberate effort
among many welfare-reforming countries to “make work
pay” for lower-income working households. This usually
entailed a shift away from cash entitlements for families
out of work to wage support for working families on low incomes.
In the US for instance, the old Assistance
for Families with Dependent Children (AFDC) programme was
scrapped and the earned income tax credit (EITC) for low-income
workers expanded significantly. The UK government under New
Labour has also sought to cut back on unemployment benefits
and to transfer the savings to a new working family tax credit,
which is essentially a wage supplement for low-income earners.
These measures strengthen, rather than weaken, work incentives.
In era of widening income disparities, they are an incentive-compatible
way for the state to re-distribute incomes and support work
among less-skilled workers.
The experience of wage supplementation in
countries that have implemented it has been largely positive.
Reagan considered the Earned Income Tax Credit—America’s
wage supplementation programme—“the best anti-poverty,
the best pro-family, the best job creation measure to come
out of Congress”. Such programmes enjoy broad-based
political support, and it is not difficult to understand why.
The traditional welfare model is decaying in continental Europe;
instead of paying full benefits to the unemployed, wage supplementation
presents itself as a more sustainable model—it keeps
people at their work, while ensuring they earn living wages;
it seeks to be a “hand up, not a hand out”.
This edition of Ethos Perspectives explores
the subject of wage supplements, as Singapore’s own
Workfare Income Supplement Scheme is slated to roll out in
July 2007. (References 1 and 2 advance wage supplementation
as an effective tool for coping with our economic realities;
Reference 3 presents the US’ experience at wage supplementation;
and Reference 4 discusses how wage supplementation should
develop in the long term).
Reference 1: “Subsidies that
Save” by Edmund S. Phelps
Free market proponents maintain that paying employers subsidies
to hire workers is a mistake, and argue that by allowing employers
to dismiss workers more easily, they will hire with less hesitation.
Phelps points out that this approach has its inadequacies.
First, it will not eliminate unemployment significantly. Second,
and more fundamentally, it will not change low-wage workers
to high value-producing employees.
Phelps observes that workers with low qualifications
are paid so poorly that it is discouragingly difficult for
them to hold on to their jobs over time. Others, who cannot
even justify a minimum wage for their work, are cut off from
labour participation and with that, lose out on personal growth
and development opportunities that come from working. In turn,
this leads to other social problems of crime, violence and
dependency. The lack of good jobs lends itself to populist
causes that advocate a more protectionist stance, which is
contrary to the country’s long term economic interest.
The solution, Phelps suggests, is an employment
subsidy paid to employers for hiring low-wage workers. It
should be adjusted according to the level of the worker’s
pay, where subsidies decrease as pay increases, until it drops
to zero. This would facilitate the employment of workers who
previously could not command a pay above the minimum wage,
and also boost the incomes of low-wage workers.
Phelps, Edmund S. "Subsidies that Save."
New York, USA: Project Syndicate, 2006. http://www.project-syndicate.org
(accessed March 1, 2007).
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