Workfare: the Effect on Working Families and the Deficit

How the market transforms assistance to the working poor into a subsidy for business and the wealthy.

The Congressional Budget Office’s (CBO) cost estimate is out on the Dream Act (S.3992) and the numbers are confusing and counter intuitive.  For the first ten years of the Dream Act, the budget effects are in the black.  After that first ten years though, the cost goes sharply negative.  One might assume that as workers mature, their positive effect on the tax base would increase.   But the increasing negative deficit effect of these newly minted Dream Act workers highlights the under reported effect of federal assistance of low income working families on the deficit.

The change in immigration status of the Dream Act population accounts for the change in contribution that Dream Act workers make to our national treasury.  Initially, those unauthorized residents that qualify for the Dream Act will be given “conditional non-immigrant status”.  This status limits access to many federal benefits, but as the Dream Act population meets the requirements of the Dream Act and become “legal permanent residents” they become eligible for the full range of federal benefits, including those intended to supplement the income of the poor (in this context by “poor” I mean the poor that are not participating in the work force) and low income workers (the working poor).

The CBO states that once the Dream Act population, as a whole, begins to shift their immigration status to “LPR status after 2020 (this) would lead to significant increase in spending for the federal health insurance exchanges, Medicaid, and the Supplemental Nutrition Assistance Program (SNAP more commonly known as “food stamps).”

The CBO is acknowledging the fact that if the Dream Act passes, many of the Dream Act Americans, like millions of current Americans, will become members of the working poor.  Or what I call “tax takers”, meaning that many working Americans receive more in direct federal aid then they pay in taxes.  This is not meant to be a derogatory term, it is merely meant to inform the discussion of how millions of workers have become members of a subsidized work force.

The federal government’s attempt to offset the low pay offered to the workers in the current labor market manifests itself in two forms.  First the tax code has been adjusted to eliminate taxes on the working poor and, in the case of the earned income tax credit, to pay back to families more money in taxes than they paid in.  Currently, 47 percent of American families pay no federal income tax or get more back them they paid in.  This number has been steadily rising.  The other forms of assistance are the numerous federal (and state) programs available to the working poor including SNAP and Medicaid.

This package of tax reform and assistance programs, commonly known as workfare, has built up over time as a policy response  to the perception that welfare was creating a disincentive to work and that those who truly wanted to work, struggled to bridge the gap between welfare and pay available with many low skilled entry level jobs.  The goal of workfare was to insure that as individuals moved off the welfare rolls into the work place, they would experience, however modest, an increase in their spending power.  The idea was to make working affordable to welfare recipients and give them a real monetary incentive to work.

As a temporary leg up into the world of employment, the concept of Workfare seemed to be showing some early positive results.  But Workfare soon became a victim of its own success and of a labor market that was failing to provide low skilled workers a ladder to better paying employment with quality benefits.  As the labor market shifted to lower paying service industry jobs with far less upward mobility (dead end jobs) Workfare workers found themselves permanently eligible for federal programs and paying little or no federal income tax.

Over time, the labor market began to erode the increase in spending power the government programs and tax credits provided to low wage workers.  Wages of low pay employer’s simply edged downward in real terms to adjust worker pay to the spending power they would have without the lower income tax rates and other government assistance.  The Workfare concept failed, over time, to fool the market into providing workers with an equivalent spending power above what the market would bear.  This market adjustment was largely achieved through the failure of low paid worker wages to keep up with the rate of inflation.

This declining ability of workfare assistance to maintain the spending power of the low wage work force is evidenced in the fact that the real wages of the lowest paid workers have declined in recent years and that low paid workers have fared worst in terms of income growth than any other income groups.

The Workfare concept has simply allowed employers to attract a low skilled work force at a lower wage.  Because the employer portion of the payroll tax is paid on the gross wages, the effect of subsidized wages is to lower the employer payroll tax obligation.  Also, because Social Security benefits are calculated on the gross wages over the course of workers’ employment history, low wage workers will receive equivalent deceases in their monthly retirement benefits.

This subsidized labor force crowds out business models that would rely on a higher paid more productive work force and the subsidized work force also dis-incentivizes business to make capital improvements to increase productivity.

Because much of the work force subsidies of low wages workers is financed by deficit spending and the fact that our tax code has a low factor of progressiveness, high income families with the highest level of discretionary income benefit the most from the lower cost of the goods and services that this subsidized labor force provides.

The net effect of a package of programs that collectively can be called Workfare, designed to increase the spending power of low wage earners and move them up the employment ladder, is to lower the labor cost of the lowest paying employers, lower the cost of goods and services to high income earners, increase the deficit and provides no real benefits to those that Workfare purports to help; low income working families.

Given all the complexities of our current labor force policies related to low wage workers, you may ask why we would want to support any program that would increase the number of low skilled, low paid workers to the work force.   And given the high unemployment in states with high concentrations of illegal immigrants, I do find it perplexing that the CBO made no mention of the negative effect on tax revenues based on displacement of workers by newly legalized workers.  You may also believe, as others do, that the CBO has underestimated the upward mobility of the Dream Act population.  Your tolerance to the cost of the Dream Act may largely depend on your sympathy to the plight of the population of immigrants that entered this country illegally through no fault of their own actions.

Regardless of where you come down on the merits of the Dream Act, until we address our failed labor and tax policy, with respect to the working poor, we will continue to have a distorted labor market that best serves those that are in least need of our help.

We should also bear in mind that the effect of a general amnesty for the whole illegal immigrant population (who know full well that they entered the US in violation of our immigration laws) will increase the negative effect on the labor market and on the deficit by the order of magnitude of 15 or 20 times when compared to the Dream Act.

See the cost estimate of the Dream Act by the Congressional Budget Office:

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