Thursday, May 25, 2023

Work requirements

The debate over work requirements for social programs is hot and heavy. I'll chime in there as I don't think even the Wall Street Journal Editorial pages have stated the issue clearly from an economic point of view.  As usual, it's getting obfuscated in a moral cloud by both sides: How could you be so heartless as to force unfortunate people to work, vs. how immoral it is to subsidize indolence, and value of the "culture" of self-sufficiency. 

Economics, as usual, offers a straightforward value-free way to think about the issue: Incentives. When you put all our social programs together, low income Americans face roughly 100% marginal tax rates. Earn an extra dollar, lose a dollar of benefits. It's not that simple, of course, with multiple cliffs of infinite tax rates (earn an extra cent, lose a program entirely), and depends on how many and which programs people sign up for. But the order of magnitude is right. 

The incentive effect is clear: don't work (legally). As Phil Gramm and Mike Solon report

Since 1967, average inflation-adjusted transfer payments to low-income households—the bottom 20%—have grown from $9,677 to $45,389. During that same period, the percentage of prime working-age adults in the bottom 20% of income earners who actually worked collapsed from 68% to 36%.

36%. The latter number is my main point, we'll get to cost later. Similarly, the WSJ points to  a report by Jonathan Bain and Jonathan Ingram at the Foundation for Government Accountability that

there are four million able-bodied adults without dependents on food stamps, and three in four don’t work at all. Less than 3% work full-time.


Incentives are a budget constraint to government policy, hard and immutable. Your feelings about people one way or another do not move the incentives at all. A gift of money with an income phase-out leads people to work less, and to require more gifts of money.  That's just a fact. 

What to do? 

One answer is, remove the income phaseouts. Give food stamps, medicaid, housing subsidies,  earned income tax credits, and so forth, to everyone, and don't reduce them with income. Then the disincentive to work is much reduced. (There is still the "income effect," but in my judgement that's a lot smaller for most people in this category.) 

Rather obviously, that's impractical. Even the US, even if r<g or MMT are true, would run out of money quickly. That's the problem with Universal Basic Income. Even $20,000 x 331 million = $6.6 trillion, essentially the entire federal budget right there, and $20,000 of total support is a lot less than people with $0 income get right now. (Gramm, Ekelund and Early, and Casey Mulligan estimate about $60,000 is the right number here.)  Put another way, to eliminate the work disincentive in the social programs, we would have to jack up marginal tax rates on everyone to such stratospheric levels that nobody works. You can't escape disincentives. 

So, support for the unfortunate must be limited somehow. That's why we limit it to people below a certain income level. But even if each individual program maintains a reasonable marginal phaseout, they add up across programs, and next thing you know we're back to 100% phase out. 

Posit that work is still desirable,  to earn some money, to contribute to your fellow citizens, to reduce the need for income assistance, and to build human capital.  (Plus the more ephemeral goals all sides of the debate ascribe to work -- self reliance, life meaning, self-respect, participation in society, and so forth. I promised no moral or sociological arguments, but these values being shared by both sides of the debate, I can make a little exception. Nobody thinks that an entire lifetime of living on a government check, doing nothing but drink take drugs and play video games all day, makes for a desirable society, no matter who they vote for.)  

If so, if the social safety net creates a 100% marginal tax rate on work, and if abandoning income phaseouts will bankrupt the state, then we have a problem. 

Work requirements are an imperfect method to try to replace the incentive to work that social programs eliminate. Our government does this sort of thing all over to transfer income but contain the disincentives: Subsidize gas, and then regulate against its use for example. 

It is inefficient, as you can tell from the brouhaha. It's much more efficient to get people to work by saying "if you earn a dollar, you can keep it," rather than "if you earn a dollar we'll take it away from you but we're going to force you to work." As the WSJ details here and often, the rules are complex, and people and governments game them. Just who should work? Progressives will quickly find a sick single mother taking care of elderly parents and commuting to some horrible fast food job who falls through the cracks, and they are right. Rules and bureaucracies are very rough substitutes for market incentives. More importantly, if you're working for money, you find the best job you can, you work hard, you look for better opportunities. If you're working to satisfy a bureaucratic work requirement in the face of a 100% tax rate, you find the easiest job you can, you don't care about the money and thereby the social productivity of the work, and you do as little as possible. 

So I'm not defending work requirements as a perfect offset to a 100% marginal tax rate. But they are there for a reason, as a very rough offset to some of the huge disincentives that means-tested programs pose. The point today is that we should start to understand and debate work requirements in this framework. If you're going to remove market incentives, you need some replacement. 

By the way, supposedly socialist Europe, after its experience with "the dole" in the early 1990s, is much more heard-hearted about these sorts of incentives than we are. Progressives who think we should both emulate nordic countries and also expand our safety net should go look at nordic countries. 

Is there a better way? I've long played with the idea of limiting help by time rather than by income. That's how unemployment insurance works. We understand that replacing people's paycheck forever if they lose their job has bad incentive effects. Unemployment is understood as a temporary misfortune, and understanding the incentives, you get unemployment checks for a limited amount of time. Could not many other programs aimed at misfortune also be limited by time -- but then allow you to keep each extra dollar of earnings? Perhaps even unemployment should be a fixed amount of time, and you can keep receiving it for the full (normally) 26 weeks even if you get a job. 

The trouble with that, of course, is that some people will not get their acts together in the required time, and then you have to be heartless. But is it not just as heartless to say to a person who had been on food stamps, earned income tax credit, social security disability and housing voucher, "well, congrats on getting  a job, and a good one, that pays $60,000 per year. Now we're taking away all your benefits. Enjoy the $1?" 

Also, the safety net does include a detailed bureaucracy to determine who is needy. Disability, unemployment, and so forth look hard at these issues. Replicating that with a different set of rules for each program seems mighty wasteful. 

Another wild idea: Good economists all understand that consumption, not income, is the right measure of well being. That's why consumption taxes are a good idea, and we should measure consumption diversity not income diversity. (I don't use the word "inequality" anymore as it prejudices the right answer.) One advantage of a consumption tax is that it would be easier to condition benefits on consumption rather than income. If you work and save the results, you can keep your benefits. 

One last point, which maybe should be the first point. It is a bit scandalous that income phase outs in social programs take away benefits based on market income, but not social program income. If you have food stamps and earn an extra $10,000 of income, you can lose your foods stamps. If you get housing worth $10,000, you don't lose anything. Ditto in the entire social program system. This is an immense distortion towards putting effort into obtaining more social programs rather than working. Phasing out based on consumption, including cash and non cash benefits, would make a lot more sense. But one could phase out benefits based on which other benefits you receive too. Disincentives come from the social program and tax system overall, and any hope of continuing disincentives and saving money must take a similar integrated system approach. 

The argument also is over how much money the programs cost. That leads to "how could you be so heartless" vs. "but the country will go broke," also going nowhere. A focus on incentives offers the way out. Fix the incentives, and we end up helping people who need it a lot better, we end up with a lot fewer people who need help, and spend a lot less money. Win win win. 

There is no clean answer. A main lesson of economics is that there is always a tradeoff between help and disincentives, between insurance and moral hazard. We can make this tradeoff a lot more efficient than it is, but we can't totally eliminate the tradeoff. 

The bottom line remains, this discussion would be a lot more productive discussion if we talked about the constraint posed by incentives, rather than the usual moral mudslinging.    


So work requirements are a little tightened, but not if you have Medicaid. WTF? Medicaid is limited by income. The incentive spaghetti here would be fun to unravel. Of course, we have an  additional reason to stay below the income cap for Medicaid. We have an additional incentive to sign up for Medicaid, which may be the idea here. "Get a job, lose your food stamps, or sign up for this free government program." Hmm. Feel free to riff on this one in the comments... 




  1. This was so well thought out I can’t find anything to disagree with. There were a number of details I was ignorant about. Thanks John. 👍🏿

    1. I was born in 1960. My folks divorced w/5 children. My fathers support was not enough in 1966. I am not sure what extra my mom recieved. I have been around the working poor most of my life. There were a lot of people trying to game the system just to get ahead of where they were at the time = poor. Working under the table and at jobs that had cash tips. When Clinton put a sunset on welfare and housing subsidies for some, it forced my brother and his family OFF. They did it - because they were forced to and it worked sort-of. They were still poor and lazy.
      Something like this could work. Lower the amount given by a lot. Just above or at the poverty line. If you chose to live on welfare and other benefits you will be "really" poor. At the same time give people 3 years to get off the dole, and let them keep all they earn at a job and recieve the welfare etc.. No penalties for a man in the house with income. No payment of rent for public housing. Code the EBT cards (which would be easy) so you can not buy booze soda etc.. Like it used to be with food stamps. Maybe bring back paper food stamps to increase the shame factor. I remember having to put items back on the shelf from my mom's cart at check-out.
      After 3 years individuals can keep all the money they can earn and save in that time frame - THEN YOU ARE DONE! i THOUGHT THIS IN THE 90'S WHEN IT HAPPENED TO MY OLDER BROTHER.
      Give people the incentive to work by making being on the dole worse than having a job. It "should" be punishing to be on welfare. And no welfare for single working age people with no kids, addicted or not.

  2. Whatever happened to the War on Poverty? Most of our social welfare programs aim to enable people to remain poor. Few of them aim to get people out of poverty. The same is true for homelessness: we have a homeless-industrial complex that spends billions helping people to remain homeless and nothing to help them rejoin mainstream society.

    I can think of at least one program that has helped people out of poverty: low-interest loans for buying or repairing a car, thus giving people the mobility they need to get and hold a job, find better housing, and access to lower-cost food and other consumer goods. The Federal Highway Administration gave a number of non-profit groups seed money to start such loan program in the late 2000s and all reported high rates of success: the people got jobs, got off of welfare programs, got better housing, etc. Maybe it wouldn't work for everyone, but programs that get people out of poverty make more sense than ones that allow them to remain poor.

    1. I'll have to look that one up. Great story. Instead we consign the poor to incredibly expensive but slow public transportation.

    2. How long do most people stay in the lowest quintile?

    3. see:

      Very roughly, the odds of a child born in the lowest quintile moving to the highest are somewhat less than half that of random chance.

    4. Not what I was asking for, but interesting nonetheless. I think there are many other aspects to this outcome than only being born in poverty, although those likely are related to being within that cohort.

  3. Thanks for the comprehensive analysis of the topic. Bottom line is no matter how you change it, there is an incentive to not work. Since you can't eliminate this effect, the only answer is to reduce the value of benefits the shift the curve toward self reliance. This is a great time to do that. Cut by half, don't adjust for inflation, and reduce the integrate the benefits so you one program reduces the other for each beneficiary. That will work in reducing incentive to not work

  4. You should study the quantity of work done by those on welfare in the under-ground economy, I believe that most work now for unreported cash or other goods.

    1. Yes, it’s unfortunate that there are abusers taking advantage of the systems.

  5. Maybe Germany doesn’t qualify as a “Nordic European country”. But certainly, you don’t want to consider copy/paste from their current system:

  6. "Since you have established yourselves as a people, have you not yet discovered the secret of forcing all the rich to make all the poor work? Are you still ignorant of the first principles of the police?"

    - Madness and Civilization, page 46 (Michel Foucault)

    Europe had tried forced work as a means to purge laziness, which was largely Biblically inspired to cure vagabonds, the poor, and the insane from their spiritual affliction that made them economically and socially useless: sloth. Guess what? It didn't work. In fact, it caused economic disruptions due to cheap labor some guilds had that others did not.

    While there is the myth of rugged individualism, the reality is that no one does it on their own, for if they were, they'd be a diety with no concern of death and scarcity.

    So, where are the real points of failure? Social capital, specifically linking capital, which are the people who have access to resources to help them move forward in life. Right now, the social safety net and social workers are the providers of social capital of last resort when people are destitute and desperate. This costs money, however.

    Incentives only make sense to rational economic agents. Everyone is an economist in the end: what's the better deal. Economists are largely ignorant about the nature of addiction on a social and neurological level. So we can talk about incentives, sure, but if we don't understand where people are at, discussing incentives or promoting them is like trying to smell a flower with your ear.

  7. What is the support for a 100% marginal tax rate claim? Yes, there are some cliffs, but I do a lot of taxes for low-income people and don’t see that. E.g., EITC phases in and out gradually based on earned income and number of children. Ditto Child Tax Credit. Becoming ineligible for Medicaid makes you eligible for ACA Premium Tax Credit, another phased credit.
    Gramm et al break out the “big four” programs that make up the $45,389 average transfer payment for the bottom quintile in their book: $18,944 (42%) Soc Sec OASI and Medicare; $9,634 (21%) Medicaid; $2,575 (6%) SSDI; $1,504 (3%) SNAP; the rest a mix of tax credits such as those above and other federal and state programs.
    What are the incentives? I assume we can rule out work requirements for Soc Sec and Medicare. Medicaid? You can’t buy groceries with it and you only use it if you’re sick. I’ve never met anyone who didn’t work because they had Medicaid. And again, those who earn too much for Medicaid are eligible for the Premium Tax Credit. SSDI (and SSI) may be abused by some, but are we expecting a work requirement to trigger a wave of honesty?
    That leaves SNAP. Gramm et al report that 36% of prime age adults in bottom quintile worked, compared with 85% and more in higher quintiles, which results in 17.2 avg hours worked per week vs 32 hours in the next quintile. The 15 hr difference would imply an avg SNAP subsidy of less than $2 per hour not worked, hardly enough to stay home and eat bonbons.
    What to do?
    People’s ability to subsist without working, or working full-time, as a result of safety net programs should also be weighed against the downward pressure on wages that work requirements create. While the budget constraint is presumably real (although one might be forgiven some doubt in light of the last two years), the policy debate is about redistribution. And that is indeed the moral cloud that even 'value-free' economics won’t clear up for us.

    Peter H

  8. One disincentive to encourage users to limit use of programs is to limit their choices. Why should SNAP pay for junk food, for example?

  9. I think something like this could work:

    A generous but refundable standard deduction. Let's say $20,000 per person (it is almost $14,000 today). But, if your income is less than $20,000 a year, then you have to "earn" the refundable part. For instance, the government could give you $20 for every hour worked, up to a maximum of 1000 hours a year. So for instance, if you earned $5,000 but worked 500 hours, then you would get a tax refund of 500*$20 = $10,000, and so your post-tax income would be $15,000.

  10. "earned income tax credit, social security disability "? They must have some kind of job to get EITC. Or alimony.

  11. High marginal tax rates of government transfer payments and benefits are an incentive to the recipients to trade labor for unreported monetary income, services, and tangible goods that can be used, bartered, or sold. The ratio of leisure to work of government benefit recipients is probably lower than the public perceives when undisclosed work is included. As Abhijit Banerjee and Esther Duflo have noted, the world's poor have too much idle time. The recipient's reserve wage price is likely closer to the value of benefits and undisclosed income and initially unobtainable by the benefit recipient due to a lack of skills, experience, and physical or mental ability.

  12. Most people pay into social security. If these funds (employee and employer contributions) had been invested in the private markets, people would have far more in some in retirement than what social security pays today. Social security gives government a huge incentive to extract large amounts of cash from the ecomony and direct them to lower productive government programs and projects.

    Tax consumption, give everyone a basic refund to cover "issues". Social. Welfare programs can address inequities but use time and performance to constrain dependency.

    We don't need a lottery solution to inequalities. If people think give ngn$1 millions to compensate for past racism, we will just find ourselves in 20 years wondering why we still have inequities because the funds would be use unproductively.

  13. thank you for presenting facts and ideas. I have to think about your ideas more. I've always disliked the consumption tax, because I don't like the government coercing me and taxing everything I do. If it replaced the income tax, I might be for it but it will still control behavior. I know of folks who have pride and want to work hard and receive the promotion offered, but it reduces their total income with the benefits reduction.

  14. Mr. Chochrane said "One answer is, remove the income phaseouts. Give food stamps, medicaid, housing subsidies, earned income tax credits, and so forth, to everyone, and don't reduce them with income. Then the disincentive to work is much reduced. (There is still the "income effect," but in my judgement that's a lot smaller for most people in this category.)"

    Absolute genius! The only thing I would add is that the Federal tax code should consider these subsidies as part and parcel of the standard deduction. By this I mean: people who are not participating in any of the federal assistance programs could take a $45,000 standard deduction on Federal income taxes. The amount of the standard deduction would be reduced by they amount of assistance someone received. Income above the "adjusted" standard deduction would be taxed at the current marginal rates for adjusted gross income.

    The only thing "impractical" about this is that the standard deduction increases from today's $17,000 (on average) to $45,000 and this means that total standard deductions would be something like $4.4 trillion. Total deductions today (standard and itemized) are about $3.1 trillion. This $1.3 trillion increase in the amount of deductions would represent a 13% decrease in the total taxable income which today is $9.8 trillion. To me 13% loss of taxable income to the IRS does not seem to be an insurmountable gap to fill with other policy adjustments.

    Another thing I love about the idea of proposing $45,000 standard deduction (with no phase out of assistance programs) is that it would open discussions about the purpose of the standard deduction. Once upon a time the standard deduction was supposed to be large enough that money spent on essential living expenses of food clothing and shelter were not taxed. Clearly this is no longer the case if average subsidies to the bottom 20% amount to $45,000 annually. I would also think that if we did in fact move to a consumption tax system, an exemption on the order of $45k would be needed to preserve a similar degree of progressiveness to the tax code that we have today.

  15. Impose a national sales tax and give people the option to pay income taxes and get a "sales tax exempt card", in the amount of the taxes they paid. Add to that an optional, simplified negative income tax with flat rate plan that can be selected in lieu of all current benefits and income and payroll taxes. I'm an economist who likes choices.

  16. What if any do you think risk aversion plays into these incentives? Government subsidy is essentially risk free, while holding and maintaining a job comes with inherent risks such as losing the job, transportation issues, evictions, child care, etc. Does a time limit move the needle at all, possibly creating enough "risk" that makes getting a job less risky than keeping the subsidy and moving people from subsidies to the work force? If not is there a solution out there than can be framed in such a manner?

  17. Great points about the disincentive built into the current system of government benefits. We have been arguing similarly for a couple of decades. See I am not as pessimistic about the affordability of eliminating means testing. Consider financing the government benefits with a flat tax. Let that be the only disincentive to earning more money. I am thinking a rate around 25% to fund the whole federal government benefit program. That amount of money would provide a pretty good balance between the safety net and incentive. This would eliminate so many of the current programs and expenditures that significant reductions could be made in other taxes, leaving the vast majority of marginal earning increases with the worker. Change the incentives, and the taxed income would skyrocket, providing resources to fund the program. What do you think?


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