All Commentary
Monday, June 1, 1998

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

Phelps's Subsidies Would Impose Burdens on Some to Provide for Others

Economist Edmund Phelps proposes a new panacea for the troubles and pathologies of “disadvantaged” people in America—federal employment subsidies for low-wage workers. This book has delighted liberal interventionists, but I find it appalling.

Phelps begins by defining the “disadvantaged” as those in the bottom one-third income group. The subsidies he proposes would be credits against payroll and corporate tax liabilities for “qualified employers” who take on disadvantaged people for “eligible jobs.” The credit would start at three dollars an hour for a worker whose “private productivity” is valued at four dollars an hour, and gradually decline at a decreasing rate to a $0.06 subsidy for a worker whose private productivity is valued at $12. He emphasizes that, unlike welfare, these subsidies could not be exploited by people who refuse employment.

Phelps asserts that his employment subsidies would “empower capitalism” by encouraging the “disadvantaged” to work, increase their self-esteem, and make them more self-supporting (hence the subtitle of the book). Once this happens there will be a greatly diminished role for welfare, since only the disabled would need it.

Phelps provides a justification for his subsidies based on the welfare economics of A. C. Pigou. He argues that a disadvantaged worker’s “social productivity” is the sum of his “private productivity” and his “external productivity.” Private productivity is “the productivity within the business.” It is what the worker’s labor services are worth to the employer. External productivity is the additional benefit enjoyed by society as a whole because of the worker’s increased ability “to support [himself] and exercise responsibility as a citizen, community member, parent and spouse.” A subsidy, “calibrated to the correct size,” would supposedly internalize this “eternal productivity.”

Such a scheme ignores all that we have learned from the public-choice school of political economy about government failure and from F. A. Hayek about the division of knowledge. Every government subsidy comes with increased government regulation. Just what is an “eligible job”? Who are the “qualified employers”? Is there to be yet another division of the Department of Labor charged with certifying jobs and employers? Phelps claims his plan would pay for itself through savings on welfare and crime. However, once such a scheme is put into place, interest groups like labor unions would advocate expansion of the subsidies, just as they have successfully done with the minimum-wage law. The subsidies would inevitably become just another increasingly costly feature of the welfare/transfer society.

Moreover, how can government calibrate the “correct” size of the subsidy for each worker in every job? Phelps’s arbitrary sliding scale of subsidies would apply to all workers at all times and places irrespective of their unique circumstances. When we recognize that decisions will be based on politics, not economics, there is nothing left of the Phelps subsidies to recommend.

But there is much more to criticize about this book. For example, Phelps writes: “In acting through the government to pull up the rewards and thus to stimulate the participation and employment of low-wage workers, the more fortunate members of the labor force would be removing a source of some embarrassment. The more advantaged in society would gain pride and self-respect from having met their end of the social contract—of having acted justly. If so, they will be willing to pay something to achieve this satisfaction in the form of higher taxes.”

He apparently believes successful people are merely lucky. In fact, of course, most successful people earned every penny they have by perfectly honorable means—voluntary exchange. They did well for themselves by providing opportunities to others. I can think of no better grounds for self-respect. It is apparently necessary to say one more time that if successful people really thought that they should help less successful people, they would do so. They don’t need to wait for taxation to act.

Phelps also asserts that his subsidy scheme “fits the founders’ conception of our government.” He says that Jefferson’s assertion in the Declaration of Independence of an inalienable right to the pursuit of happiness necessarily implies a right to a rewarding job. This is preposterous. To the founders, “rights” referred to a freedom of peaceful action that is prior to, and independent of, government. The founders’ rights impose only a negative obligation on others to abstain from interfering. Government’s principal job is to enforce those rights. Phelps’s subsidies are positive “rights.” They impose burdens on some to provide for others. The rights of those forced to pay conflict with the “rights” of those who are privileged to receive.

Perhaps the silliest claim in the book is Phelps’s assertion that Keynes, along with Adam Smith and John Stuart Mill, was a “classical economic liberal.” That says it all.

  • Charles Baird is a professor of economics emeritus at California State University at East Bay.

    He specializes in the law and economics of labor relations, a subject on which he has published several articles in refereed journals and numerous shorter pieces with FEE.