Economists call this an "effective high marginal tax rate" because the incentive to off welfare is reduced in much the same way that high marginal tax rates reduce the incentive to work harder.
So how do welfare recipients respond to these incentives? A randomized trial from Canada sheds light on the answer:
Basically, a group of welfare recipients were randomly split into a treatment group that received a supplementary payment that reduced the effective marginal tax rate on income from 100 percent to 50 percent for a three -year period, and were compared to a control group that was randomly selected to receive no change to the current program. (The details are available in an excellent program final report from 2002.)
The findings:
People respond to incentives. During the period of the reduced marginal tax rate, reported work earnings and reported income rose for the test group vs. control during the experimental period.Marginal is not average. At the peak effect of the program (16 months after random assignment), about 30 percent of the treatment group were employed full-time versus 15 percent of the control group. — the vast majority did very little different than they would have done otherwise...This cost taxpayers more money, not less. In round numbers, as compared to control the treatment increased total reported take-home earnings by about $200 CD [Canadian $] per month, about $100 CD of which was greater reported wage income, and about $100 CD of which was the supplemental cash transfer from the governmentThe effect disappeared after the program ended. After the program period (... about five years after program entry), the treatment group had about the same level of reported employment and income as the control group.
HT: Instapundit
We see the same effect here in the US in certain states when a employe gets in a work accident, they take home the same amount of money through workers comp that they can take home by working full time ( without overtime of course). So my boss used to question why we had so many accidents compared to some of the other plants?. We came to find out that a lot of people were just playing the system. As we increased accountability and stiffened the rules in the operation, the accidents starting coming down. What was the incentive for people to work vs. faking an injury and staying off work making the same money?. Incredible, but this happens everyday if we allow it.
ReplyDeleteI'm curious what types of jobs individuals in both groups secured. My hunch is that those in the experimental group were willing to take lower wage jobs than those in the control group. The link to the report is broken as of 12/10/13.
ReplyDeleteThis reminds me of a recent HBR article I read by Samuel Bowles, “When Economic Incentives Backfire”. He notes that an economist named Richard Titmuss provided some excellent insights in the context of when economic incentives don’t work. For example, he cites a study where paying people for donating blood actually lowered the blood supply. In similar studies, economists how found that letting people donate money to a charity as a part of their blood donation reverses the negative impact of paying them for donating blood outright (n.p.). This is very interesting indeed.
ReplyDeleteBowles notes that “Rewarding blood donations may backfire because it suggests that the donor is less interested in being altruistic than in making a buck” (n.p.).
In another study in Israel, six day-care centers fined parents for being late to pick up their kids. The results? According to Bowles “the number of tardy parents doubled.” Bowles relates that when economic incentives offend our “ethical sensibilities”, we often will do the opposite of what was intended.
Dave
Reference:
Bowles, S. (2009, March). When Economic Incentives Backfire. Harvard Business Review. Retrieved from https://hbr.org/2009/03/when-economic-incentives-backfire/ar/1
I once read a book about welfare benefits and states’ attempts to get recipients back to work. One state tried to dis-incentivize welfare recipients by requiring them to do menial work in order to get their welfare check. Some people did meaningful work, like clean up the highway, which benefitted the community. However, many simply did things like sorting marbles. The intention was to make the work so boring and unappealing that recipients would rather get a “real” job and stop living off of their welfare benefits. I believe that this resembles a “reverse incentive” where the incentive for getting off of welfare is to not have to spend eight hours a day doing boring and repetitive tasks.
ReplyDeleteThere are more than 70 separate welfare programs operated by the federal government today. The cumulative cost is nearly $1 trillion per year and rapidly expanding on President Obama’s watch. In many cases, economists have calculated welfare recipients who enter the work force or receive pay raises lose a dollar or more of benefits for each additional dollar they earn. The system makes fools of those who work hard.” The more benefits the government provides, the stronger the disincentive to work.” Less work and lower earnings, in turn, translate into greater dependency on the government — and zero or even downward social and economic mobility for those mired in poverty (Bluey).
ReplyDeleteFGA is proposing a three-part approach which it claims can fix many of the problems throughout the system. Its plan includes having better screening, having periodic checkups and allowing public prosecution and oversight. “States can deter eligibility fraud by publicly prosecuting individuals who knowingly scam the system,” the report detailed.” All cases of fraud and misrepresentation should be referred to the appropriate authorities for prosecution and benefit recovery. States would be able to use traditional collection tools, including garnishing wages or tax refunds, in order to recover the value of fraudulently-obtained benefits.” We are just as much in need of a robust reform effort with the strong support of the public. It is time to turn ending “welfare as we know it” from an old slogan into a reality.
Work Cited:
Bluey, R. (2010) Do welfare recipients have an incentive to work? Retrieved from: http://hotair.com/archives/2012/08/10/do-welfare-recipients-have-an-incentive-to-work/
Wolf, C. (2015) The Worst Examples of Welfare Fraud and how to fix them. Retrieved from: http://dailycaller.com/2015/04/04/report-the-worst-examples-of-welfare-fraud-and-how-to-fix-them/
Any job can be great if we are good enough to take the opportunity, but if we are unable to hold up this responsibility than we could be in for a struggle. My struggle is with nothing now ever since I joined OctaFX broker in Forex market, it’s a superb company and has all the top ingredients to make me into a winner especially with their low spread of 0.2 pips, high leverage up to 1.500 and 24/5 support service available to help me.
ReplyDeleteSorry, but the comments here are all way to shallow to properly analyze the situation. Unfortunately, this is not just about "welfare". We live in an all or nothing benefits society. People without a reportable income qualify for all kinds of benefits well beyond welfare. Housing and housing subsidies, food stamps, mass transit passes, cell phones, and legal services are just a few of the valuable benefits people can receive simply by waiving a social services benefits card. As I implied in the beginning, once a person passes the threshold income level, EVERYTHING disappears. So, the welfare recipients we are trying to entice "need" to go from no-income right to middle class to enjoy the same economic status they enjoy not working at all.
ReplyDeleteThis idea that “helping needy people can reduce the incentive to get back into the workforce” is something I saw a lot of growing up around poverty. I had friends who dropped out of high school, had a child out of marriage, and quickly began receiving medicare, food stamps, cash assistance, and HEAP. A number of them had several more kids. Suddenly, they had their own apartment, spending money, all their needs were met, and they were home with their kids. In a poor community, that could be considered success.
ReplyDeleteThen the laws changed and required them to work for some of their benefits. I saw lots of girls work just to the threshold that would allow them to make some spending money but keep receiving benefits. They often decided whether or not to do something based on how much it would impact their benefit. In a way, they were running their own “marginal analysis” – computing the cost and benefit of each step.
Unfortunately, the welfare system appears to “deter wealth creating transactions,” as outlined by Froeb in Chapter Four of Managerial Economics (2016). People engage in “shirking” or a negative response when the marginal benefit is low or the marginal cost is high. Froeb says incentive schemes are most effective when effort matters, there is little intrinsic desire to do the job, and the money boosts social status. (pg. 46) In the case of my friends, effort didn’t matter – they made minimum wage no matter how hard they worked. Their social status was almost worse working in those places than it was when they were home with their kids.
I could debate that some of us simply made better choices because we took advantage of “equal opportunity” and wagered on the high marginal benefit of going to college to produce a considerable gain in the long run; but that doesn’t paint a full picture. I had a fairly healthy home life, cheerleaders pointing me the right way, and access to a support network. Most of my friends who “chose” welfare were abused, driven out of acceptable social circles, deceived by the fathers of their children, and saw no way out. Then, welfare deterred them from ever changing their circumstances. Johnson (2008) said, “In relation to poverty as a social problem, welfare and other such programs are like doctors who keep giving bleeding patients transfusions without repairing the wounds.” Giving more benefits isn’t the answer, nor is “throwing people out on their own.” Johnson argues that both are individualistic approaches that fail to address social problems. Welfare is necessary. I used it at one point in my life, when I found myself struggling. However, there must be a significant motivating factor coupled with systematic changes to pull people from poverty. There are no simple answers.
Johnson, A. (2008). The forest and the trees sociology as life, practice, and promise (Rev. and expanded ed.). Philadelphia: Temple University Press.
Froeb, et al. (2016) Managerial economics: A problem solving approach. United States: Thomson South-Western.
Getting welfare recipients back into the job market has a lot of variables attached to it. There’s the government, state, and individuals just to name a few. The TANF benefits were set up to aid and help individuals overcome unforeseen circumstances but getting back into the work force depends on each individual. If they were determined to beat the odds and truly want gainful employment, they would use the assistance as just that, assistance. While receiving the assistance they would be looking for ways so they no longer need the assistance or as much as they previously received. They would go back to school, look for better paying jobs and enlist family for the extra boost. Some individuals don’t have the motivation or simply are ok with receiving every bit of assistance they can get and never look for a way out.
ReplyDeleteThere is a double edge sword that the more money the individual makes, their benefits decrease. Some can be denied food stamps if they make $1.00 over the income level. I can’t image a parent’s mindset knowing that because they received a cost of living wage increase they will not be able to feed their family. One would begin to think they’d be better off sitting at home and collecting the benefits instead, since they’re only probably making minimum wage anyway..
Some states offer better assistance that would enable the willing to get to the next level and some doesn’t. Certain states will not pay for child-care unless the mother works. If the mother wants to go to school full-time child-care isn’t paid for. Even if she wanted to work part-time and school part-time, child-care while in school isn’t covered by the welfare department. This can be very discouraging for those who made a mistake and are attempting to fix it. Other states pays for transportation, school supplies and child-care for a mother attending school. She would only have to work ten hours a week to keep the benefits. Again, this is great for those who truly want a better life for themselves and their child.
The government leaves the door open too wide for states to make their own rules and requirements for assistance. There should be regulated guidelines that each state follows. The guidelines should be goaled toward getting people off and not having to apply again. There should a max amount of years one can receive assistance. I think there should also be a child limit that is conceived while receiving assistance and a mandatory random drug test for applicants. Clearly, some take advantage of free money and health care benefits, but not all, and this could possibly weed the abusers out.
The tax benefit of the earned income tax credit was a great incentive tool but those who would rather not work at all it’s pointless. It did help certain individuals but it affects the marginal tax where not much of it is retained for the household of those with very low income.
Taxing hard-up Americans at 95%. (2013, September 7). Retrieved October 4, 2015, from http://www.economist.com/news/united-states/21585010-americas-welfare-state-not-working-nearly-well-it-should-taxing-hard-up-americans
Until we raise the minimum wage in the US, we will continue to have this conundrum. In many cases it simply isn’t worth it for the welfare recipient to take a job at less or even the same rates at which they can receive public assistance. Along with the actual monetary benefit, they generally receive food, heat and housing subsidies that add up in cases to two or more times the actual cash benefit.
ReplyDeleteSubsidizing them via governmental programs is a band aide that doesn’t fix the problem, it just masks it. In addition to having taxpayers foot the bill, it sends the wrong message to new entrants into the work force and also makes it unlikely that the welfare recipient will be able to self-sustain without the subsidy.