Welfare-to-work morphs into welfare plus work Rewards employers for low wages
The historic welfare reform law of 1996 was widely praised for encouraging Americans to go back to work and not stay on the dole. But after nearly two decades of experience with the law, analysts are finding it created unintended side effects such as a perverse incentive for some employers to pay skimpy wages.
Buried in the law were littleknown provisions enabling people who earn wages near the poverty level to supplement their incomes with an array of federal benefits, including food stamps, Medicaid, child care and cash wage subsidies from the Treasury.
The provisions were intended to provide incentives for people to go to work and get off welfare, even if they don’t have the skills to command wages high enough to fully support their families. The law worked as intended for the most part, and full dependence on welfare programs dropped steeply.
But economists and researchers now question whether the availability of generous benefits for people in low-wage jobs also became an incentive for employers to pay less, especially for workers who have few skills and little education. Since the law was enacted, low-wage jobs with no health care or other benefits that barely provide enough for workers to sustain themselves have proliferated.
The increase in low-wage employment accelerated during the Great Recession of 2007 to 2009 when millions of higher-paying jobs in construction, manufacturing and finance were lost. Of the 7.2 million jobs that have opened since the recession, more than half have been in low-wage professions such as retail and restaurants, where workers with dependents often must supplement their wages with federal benefits to make ends meet.
Newt Gingrich, the House speaker from Georgia who led negotiations with President Clinton to get the welfare overhaul enacted, views welfare reform as one of the Republicans’ greatest accomplishments of the 1990s. He declined to comment on the poverty wage issue despite repeated requests for an interview.
But he recently spoke out on other aspects of welfare reform that aren’t working as planned and said he is particularly disenchanted with the fraud that has plagued the Earned Income Tax Credit, one of the programs Republicans agreed to expand to supplement the incomes of former welfare recipients who land poverty-wage jobs. A report late last month from the Treasury’s inspector general found more than $110 billion in payments given out in the past decade to people who weren’t qualified.
Tommy G. Thompson, the secretary of Health and Human Services who pioneered the reforms, also has conceded that the reform program has met with “disappointing challenges.”
“It seems like we’re going backwards,” with spending on the working poor now proliferating, he told a National Press Club forum this summer.
The increase in low-wage jobs and the accompanying explosion of benefits were key factors driving federal deficits of more than $1 trillion annually during and after the recession. Big jumps in spending on food stamps, Medicaid and other welfare programs were expected for people who had been laid off. Less anticipated was the surge in benefits for those who could find only low-wage jobs to replace the higher-paying jobs they lost.
As the programs evolved, they ended up providing huge subsidies for the people receiving benefits and for the corporations that kept pay scales low and steered workers toward supplemental federal benefits, said John Slater, a partner at Focus LLC, a Washington-based investment bank.
The highest concentration of working poor is in the fast-food industry, according to a study by the University of California, Berkeley, with more than half of non-managerial workers unable to make ends meet without federal assistance.
Taxpayers fund about $7 billion a year in benefits for such fast-food workers, roughly equal to the industry’s yearly profits, the study found. About 5 percent of the nation’s 15.3 million retail workers also receive federal benefits, a situation dramatized by the recent airing of a taped phone call in which a McDonald’s corporate financial counselor advises a 10year employee of the company to apply for welfare to supplement her regular pay.
“The taxpayer is unwittingly subsidizing low-wage employers,” Mr. Slater said, “including retailers such as McDonald’s and Wal-Mart, but also many small-business owners” who pay workers the federal minimum wage of $7.25 an hour or little more.
“As always seems to be the case when Washington sets out to fix a problem, it is the unintended consequences that come back to haunt,” he said.
Protesters rally outside a McDonald’s restaurant to demand higher wages and benefits. A study found that more than half of non-managerial workers in the fast-food industry can’t make ends meet without federal assistance.