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 little-known 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 10-year 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.
Recession-related welfare spending subsided some as the economy slowly churned out more and better-paying jobs in the past year or two, but the dampening effects on wages of the recession and shift to low-wage work has not disappeared. In part because high-earning jobs were replaced with lower-paying work since the recession, average wages after adjusting for inflation have not budged since 2007, marking the worst performance of any U.S. economic recovery.
Ed Dolan, a Yale University economist and author, said the depressed state of wages has had an alarming result: Nearly one in 10 of those classified this year as poor by the Census Bureau have full-time jobs.
“Traditionally, employment has been the surest way out of poverty, but that seems to be less and less the case in the United States,” he said.
In reforming the poverty programs, Mr. Slater noted, Congress started with good intentions and enacted measures aimed at encouraging work by ensuring people on welfare do not lose all their benefits as soon as they start a job. The cost of losing health care through Medicaid, for example, which is worth as much as $10,000 a year for a family, can be enough to deter a breadwinner from taking a minimum-wage job that earns about $15,000 a year.
The prototype for the welfare reform effort was the Earned Income Tax Credit, a 1970s-era program that supplements the income of people earning poverty-level wages with cash payments from the Treasury each year when they file tax returns.
The credit, “a favorite of both political parties” for decades, last year provided as much as $5,891 in cash to poverty-level wage earners who were single and supporting three or more children, Mr. Slater noted.
“Ronald Reagan was a fan” who greatly expanded the credit during his term, he said. “The Republican Party has been particularly fond of this credit on the assumption that it encourages work, while traditional welfare programs encourage indolence.”
While dismantling the old welfare system, Congress ramped up spending on the working poor in an effort to keep them in the labor force.
Food stamps, in particular, were made more widely available during the George W. Bush administration by allowing states to distribute aid to needy working adults. Further benefits were offered under the 2009 economic stimulus program enacted by President Obama and a Democrat-led Congress. The temporary expansion of benefits expired Friday.
As it was expanding benefits, Congress let the federal minimum wage decline in inflation-adjusted dollars from 78 percent of the federally defined poverty level for a family of four to less than 59 percent today. As a result, the need for more freely available government benefits escalated as workers increasingly landed jobs that didn’t pay enough to make ends meet.
“Over the past 30 years, decisions made by the U.S. Congress have had the impact of legalizing jobs with wages far below the levels [needed] to sustain a breadwinner and a typical family of four,” Mr. Slater said. The increased welfare spending “made employment at such wages economically sustainable.”
In Mr. Slater’s view, corporations would have had to pay their workers more if the subsidies didn’t exist. He notes that the subsidies are due to expand further next year under Mr. Obama’s health care reform law, which requires people of all income levels to have health insurance and provides subsidies to those who can’t afford it and do not receive coverage from their employers.
Making work pay
The debate over making work pay comes down in part to simple math.
For a full-time breadwinner of a family of four earning the minimum wage, the combination of tax credits and other benefits provided by the government lifted his income from 61 percent of the poverty line to 87 percent — a “significant improvement in that family’s well-being,” said Arloc Sherman of the Center on Budget and Policy Priorities.
The Urban Institute estimates that the Earned Income Tax Credit lifted 5.7 million wage earners above the poverty line in 2011, while the Supplemental Nutrition Assistance Program of foods stamps lifted another 4 million out of poverty.
Jason Furman, in a white paper written as a visiting scholar at New York University before becoming chairman of Mr. Obama’s Council of Economic Advisers this year, called the extension of benefits to the working poor a “progressive success story,” even though it allows employers such as Wal-Mart and MacDonald’s to pay millions of employees poverty-level wages.
“President Clinton fought for expansions in support for low-income workers” when he negotiated the welfare reforms with Republicans in Congress, resulting in “the transformation of our social safety net from a support for the indigent to a system that makes work pay,” said Mr. Furman, who served briefly as an economic adviser to Mr. Clinton in 1996.
Moreover, while corporations profit from not having to pay higher wages, “the bulk of the benefits go to the workers, not the corporations,” he said.
Mr. Furman said the proliferation of low-wage jobs is the result of millions of American workers not having enough skills and education to command higher wages. The programs were intended to help those workers attain a “dignified” standard of living, he said.
A Wal-Mart worker whose earnings are low enough to qualify for Medicaid, for example, is better off keeping government health care benefits rather than having to pay $1,800 out of a meager yearly income to purchase insurance through the company, he said. Similarly, workers who receive food stamps are able to spend more of the cash they earn on other things, such as clothing and school supplies for their children.
As to the burden on taxpayers, Mr. Furman argued that the increase in costs from expanded benefits is more than paid for by the increase in payroll taxes and corporate taxes paid by employers as a result of funding they receive by hiring low-wage workers.