All Commentary
Wednesday, January 1, 1997

Welfare Reform

True Welfare Reform Would Eliminate Political Barriers to the Labor Market

All fashions of this world pass away. The welfare state which came into vogue during the 1930s may be with us for a while yet, but not for long. It is dying by inches, going out with the tide of socialism and its many variations.

Welfarism is bound to die from its innate venom and virus. Sired by the doctrines of labor exploitation and class conflict, born of social and economic conflict, nursed on progressive taxation and confiscation, feasting on deficit spending and monetary depreciation, and saddling its trillion dollar debt on future generations, it embodies all the social ills that men may endure. It is bound to end ignominiously as the growing burden of the welfare state is grinding more and more people into dependence and poverty. With more than $5 trillion in debt, which is expected to rise to $8 trillion in a few years and half a trillion in annual interest costs, with Medicare and Medicaid spending doubling every few years, it is destined to self-destruct, it may implode rather suddenly, like Soviet communism. Or it may disintegrate slowly, perhaps over decades, as is evident in the old industrial countries from France to Germany, Italy, and Britain.

The sweeping federal welfare act of August 22, 1996 is an indication of many more reforms to come. The legislation transfers control of much of the nation’s welfare system from the federal government to the states and imposes many new restrictions on aid. It requires workfare for most recipients, imposes strict time limits on benefits, and cuts back on benefits for immigrants. It affects millions of people for whom welfare has become a way of life.

The reform is bound to bring some confusion, pain, and condemnation. The transfer of control from the federal government to the states removes its monolithic structure and introduces a measure of flexibility and competition among the states. In time, it will lead to differences in state legislation and regulation which will give rise to large differences in welfare benefits and tax burdens. Facing economic stagnation and decline, the states most generous in benefits and most severe in tax burdens can be expected to lament the reform and call for an immediate return to the old system.

The new system of state-run workfare builds on the assumption that the recipients can actually be led to forego the dole and return to the labor market. It completely overlooks and ignores the numerous institutional obstacles which the reformers themselves have erected. Surely, some people are lured to the dole by generous benefits which may approach or even exceed the wages they could earn in the labor market. Assistance payments plus housing allowance, food stamps, and free medical care may exceed the wages an unskilled laborer may earn, which is a powerful incentive for shunning employment. But even if all such inducements were removed, real obstacles to gainful employment would remain.

Unskilled workers face formidable barriers to the labor market. Federal and state laws regulating minimum wages, child labor, and working conditions legally bar poor people from securing employment. Minimum wage legislation may be the worst barrier which millions of unskilled workers, old and young, are unable to clear. It is tragic, and yet so typical of politics, that the very legislators who enacted the workfare reform recently raised the minimum barrier to the labor market. Lifting it to $5.15 an hour to which the mandated fringe costs must be added, such as Social Security levies on employers, workman’s compensation, unemployment taxation, paid holidays, and other mandated employment costs, raising the employment costs to some $8 an hour, government is blocking countless workers from reaching the market. At $8 an hour, many welfare mothers are searching far and wide without meeting a single employer.

Other legal barriers stand, in their way. The Davis-Bacon Act of 1931 commands contractors performing work for the government or with government assistance to pay their workers “prevailing” wage rates, that is, union rates. Such rates are even higher than an $8 minimum, which makes it rather unlikely that any welfare recipient will ever clear it.

The Employment Retirement Security Act of 1974 (ERISA) and its several supplements erected unsurmountable barriers for many elderly workers. The law made pensions for elderly workers a cause of political concern, prescribing rules of eligibility, vesting portable pension benefits, and giving pension claims the same status as tax exactions. The financial burdens and the bureaucratic hazards cause many employers to be rather reluctant to engage elderly welfare people and soon thereafter pay them a pension.

Similarly, the Equal Employment Opportunity Commission (EEOC) which was created by the civil rights acts of 1964 and 1967 aims to ensure that employers do not discriminate against anyone on the basic of race, age, gender, religion or country of origin. It makes the employment of public-assistance people doubly hazardous. Prevented from entering the labor market and unable to clear the obstacles built by government, they are likely to lay the blame on employers. After all, it is they who deny employment. A simple charge of “discrimination” is easily made and rather difficult and costly to refute.

The welfare reformers are laboring to roll the welfare stone up the mountain to the barriers they themselves erected. Their inevitable failure may reinforce the very system they are seeking to abolish. A true welfare reform would eliminate the political barriers to the labor market.

  • Hans F. Sennholz (1922-2007) was Ludwig von Mises' first PhD student in the United States. He taught economics at Grove City College, 1956–1992, having been hired as department chair upon arrival. After he retired, he became president of the Foundation for Economic Education, 1992–1997.