Public Economics: Welfare and Labor

1 Public Economics: Welfare and Labor Introduction With regard to public economics, the pertinent question has always been, to what extent is government involvement actually necessary? (Barr, 2012: 12). Many proponents of governmental involvement argue that it is indeed very necessary for the government to step in so as to eliminate inequality. Opponents on the other hand argue that normally nothing good comes from government intervention since sooner or later the negative impacts always come to surface.

Despite what perspective one chooses to approach the subject of government involvement, the fact remains that government has to intervene in one way or the other. Governments are sworn to protect the rights of all their citizens, and when some of its people are unable to access fundamental rights and liberties, then government is by law mandated to intervene.

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2 Intervention is, therefore, necessary for the poor, minority groups and for gender equity (Ashenfelter & Card, 2011: 462). This paper looks at government’s intervention through welfare programs that are aimed at poor households and how such payments affect the labor economics.

The paper uses the economic theory to analyze how such programs specifically influence the labor supply through evaluation of empirical evidence.

Ways of Government Intervention Tax cuts The government normally gives its poor and disadvantaged citizens special tax reliefs so as to ensure that people continue living at a certain acceptable standard of life (Meyey & Rosenbaum, 2001: 1065). Tax cuts are especially an effective means through which the government can ensure that poor individuals who do not necessarily have college educations are still attracted to the job market. The government normally approaches the issue of tax cuts by setting up a minimum wage payable in the country. By using this minimum wage, all persons earning such amounts are subject to the lowest tax rates. However, since simply taxing at a lower rate does not necessarily translate to any advantage, tax cuts are, therefore, extended (Gilboa, 2004: 35). These cuts are extended depending on certain factors such as disability, family size and kind of family structure such as whether one is a single mother. The advantage of tax breaks are that they encourage people to participate in the economy by subsidizing the deductibles from their meager pays (Moffit, 2002: 2421).

Food stamps Alternatively, the government usually gets involved by offering to subsidize the amounts that low income individuals pay for their food. This is a very effective program especially when looks at it from the perspective of a family with young children struggling to get by. The food

3 stamps can enable a family to access healthy and nutritious meals at affordable prices (Hoynes & Schanzenbach, 2009: 112). The way food stamps work is that the government provides financial assistance in the form of stamps or debit cards which can be redeemable for food at grocery stores. Food stamps are an important way of the government empowering poor individuals by offering them sustenance. By limiting the exposure to lack of food and hunger, poor individuals can focus on other income generating activities with the knowledge that hunger is not an option (Hoynes & Schanzenbach, 2009: 117). This can encourage individuals to look for labor so as to better their lives in other ways.

Medical aid Access to quality and affordable health is one of the major requirements for low income individuals. It is also the duty of the government to ensure that none of its citizens suffer from avoidable illnesses and diseases due to a lack of resources (Kniesner & LoSasso, 2001: 3).

Medical aid can be an empowering welfare service especially for young children as it ensures that they grow up healthy. To pregnant women who cannot afford to cater for the additional medical bills that pregnancy brings, medical aid is a very crucial provision. Based on this fact, provision of medical aid can be seen as one of the most efficient means of government involvement in public economics (Steiner & Wrohlich, 2004: 29). Also, this medical aid is especially important in ensuring that poor individuals continue to participate in the work force.

For individuals receiving meager pay and working in jobs without health cover, the advantages that medical aid, whether in its entirety or in subsidized form, cannot be over emphasized (Figari et al. 2011: 275).

Labor laws

4 In terms of direct contribution to personal income, labor laws are perhaps the most effective and empowering form of welfare provision (Champlin & Knoedler, 2004: 68). These labor laws normally take the form of gender balance, anti-discriminatory and antiracial laws. As it happens in most countries, the most disenfranchised members of the society happen to be from minority ethnic and racial groups, the disabled and most also happen to be women (Black, 2012: 208). The welfare provisions by government happen to take the form of legislation that requires employers to reflect ethnic/ racial, societal and gender balance in their payrolls. This is obviously a positive move in empowerment of discriminated groups; however, employers are normally against such moves due to the impacts on productivity. An example is when government mandates that women should not be discriminated against in the work place. Thus, government puts in place legislation requiring that employers give pregnant and nursing women flexible working schedules (Meyey & Rosenbaum, 2001: 1068). Of course for the women this is positive thing, but for the employers the loss in productivity is a major negative.

How welfare affects labor supply Based on the various means through which government intervenes in public economy, welfare can be said to be playing a major role on quality and availability of labor (Steiner & Wrohlich, 2004: 34). In terms of quality, welfare programs such as medical aid contribute the promotion of good health. This is especially important for those whom without welfare could not afford and, therefore, lack access to healthcare. By taking care of the health needs of the poor, the government bolsters the number of individuals employed in jobs that do not necessarily offer health coverage. Also by offering medical aid, the government guarantees future labor by taking care of pregnant women who without the aid would have difficulties carrying the pregnancy to

5 term (APA, 2012 para 8). Favorable tax laws are effective means of convincing more and more qualified individuals to enter into the job market (Champlin & Knoedler, 2004: 73).

However, there has been a prevalent school of thought that is of the opinion that although welfare has physically bolstered labor, it has greatly affected the quality (Jha, 2009: 162). The argument is down to the fact that welfare gives individuals a sense of entitlement to basic services that ideally ought to be individual in nature, as opposed to being government’s responsibility. Based on this argument, the feeling is that once individuals perceive something as being a right, there is generally less commitment to performing their duties. Another argument is that as a result of extending welfare in the form of direct payments, individuals lack the burning passion to get into the labor market so as to personally improve their conditions (Neumark & Powers, 2004: 48). Labor laws that focus on antidiscrimination as basis for employment are said to diminish the quality of labor that employers end up with greatly. On principle, antidiscrimination laws are good for the social fabric of the country and general empowerment of the public (Smelser & Swedberg, 2005: 311). Legally controlling the kind of personnel an employer hires amounts to limiting an employer’s access to their choice of labor. Therefore, this amounts to limiting the amount of labor available for choice by an employer.

Empirical evidence Welfare, depending on who it specifically targets as a beneficiary can have a great effect on the labor out put and supply of that target group. For instance if welfare is preferentially handed out to lone parents so as to ease their financial burdens, then their contribution to the labor supply increases (Doiron, 2004: 158). The Australian government extended specific benefits to lone parents such as preferential employment, more flexible working hours and more family time in welfare reforms. By doing this the government aimed to empower struggling

6 parents who were having difficulties juggling family and work duties (Gilboa, 2004: 259).

Although such reforms are aimed at benefitting lone parents, female lone parents usually end up benefitting the most on account of their response to family geared welfare programs (Pigou, 2001: 36). Women normally take advantage of such reforms to maximize on their times with their families. This is a negative in the labor supply as most of them, though available for employment in various employment sectors, usually end up clocking fewer hours at work. The same is also applicable for men, but with their motives greatly differing from those of women of spending more time with their families.

Despite the possible negative impacts resulting from welfare reforms, the true benefit to the economy is that they contribute to increased labor supply in the economy. The labor supply is a benefit to the overall economy but to employers such programs are not very beneficial to them.

For one lone parents work considerably fewer hours than their colleagues on account of their exempted time and schedule privileges. What this means is that the employers ends up getting less value for their money in employing lone parents. Fellow employees also end up having to suffer the additional burden of performing the additional work left by their colleagues (Gilboa, 2004: 158). In a nutshell, although welfare boosts the labor supply, it has the effect of creating additional labor burdens.

Single mothers are another lot who have greatly benefited form welfare which as a result has boosted their labor supply to the economy. Policy changes in the mid 1980s to mid 1990s ensured that single mothers were given tax incentives so as to encourage them to get jobs to support their families. These tax benefits were in the form of earned income tax credit (EITC) which were aimed at giving single mothers better returns on payment (Meyey & Rosenbaum, 2001: 1065). However, the negative of such targeted programs is that they are discriminatory in

7 nature (Gilboa, 2004: 52). The main point of welfare is to give disadvantaged groups an equal opportunity. But by specifically targeting one group, others who face similar challenges end up suffering. Although the labor supply of single mothers was severely increased, those of other disadvantaged groups such as single women and married women were not increased. The reason was that without the incentives offered to single mothers, entering the labor market becomes difficult.

Perception and attitude towards welfare play a major role in influencing welfare’s impacts on labor supply (Mayhew & Bradshaw, 2004: 50). The government’s intensions of establishing the welfare program also counts towards the program’s impact on labor supply.

Many targeted individuals will more likely try to improve their lives by getting a job if they feel that welfare is a necessary and temporary measure by the government to improve their economic wellbeing. However, if the welfare program is perceived as being a permanent fixture, then more individuals are likely to take advantage of the program to freeload and not liberate their economic statuses. Perception of those driving the welfare agenda and other stakeholders also play an important role. If employers are indeed keen to follow up on the government welfare programs, then persons on welfare are more likely to follow up on the initiative since they feel welcomed (Figari et al. 2011: 274).

Conclusion Normally, the question of government’s involvement in public economic is usually met with varied opinions. Despite the differences in opinions, government’s involvement in empowering the lives of people with income difficulties to alleviate their situations is a common feature. Government gets involved through legislation such as labor and tax laws and the implementation of programs such as Medicaid and food stamps for the economically challenged.

8 Based on the economic theory and empirical evidence from three journal articles, welfare has been shown to have a significant bearing on the labor supply of specific groups. Lone parents, for instance, are empowered into getting to the labor market and single mothers are also attracted by the earned income tax credit (EITC). Throughout this correlation between welfare and labor supply, the perceptions attached to welfare and expectations have been shown to play a major role in how welfare influences labor.

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Pigou, A 2001, The economics of welfare, Transaction Publishers, Princeton, NJ Smelser, N & Swedberg, R 2005, The handbook of economic sociology, 2nd ed, Princeton University Press, Princeton, NJ Steiner, V & Wrohlich, K 2004, Work incentives and labor supply effects of the mini-jobs reform in Germany, DIW- Diskussionspapiere, No. 438, viewed October 10, 2012 http://hdl.handle.net/10419/18290