What should the federal government do to encourage people to work? Should it try supply-side incentives such as tax subsidies to supplement wages? Or raise the minimum wage? Alternatively, should it use sticks, such as cutting safety net programs for those who don’t work? Or maybe it should look to demand-side incentives, such as tax breaks for companies that produce and hire in the US? Or perhaps guarantee a federal job to everyone who needs one.
With relatively little fanfare, federal policymakers seem to be in the midst of what is becoming a profound debate over how best to get more Americans working. Curiously, it is heating up at a time when the US is very close to full employment.
A three-pronged plan
While never describing it as a single coherent plan, the Trump Administration seems to have embarked on a three-pronged strategy to increase employment among American workers: Push tough immigration laws to reduce the supply of foreign-born workers; rely on tax policy, including cuts in corporate income taxes and hikes in import tariffs to encourage firms to produce goods and hire workers in the US; and pressure people to work or train for work by removing long-standing government supports such as SNAP (food stamps), Medicaid, and housing assistance for those with little or no earnings.
The Administration took its latest step this week when the Department of Housing and Urban Development announced it will require the lowest-income residents of subsidized housing to pay more out-of-pocket for their rental costs and make it easier for local housing authorities to impose work requirements. HUD Secretary Ben Carson said such a plan was an explicit attempt to encourage residents of subsidized housing to work.
By contrast, many Democrats and some Republicans think the best way to increase the supply of workers is to increase the after-tax return to work by expanding the Earned Income Tax Credit. See here and here. The EITC is the nation’s largest subsidy program for low- and moderate-income families with children but provides only limited support for childless workers.
Waiting for EITC reform
Last year, the House GOP leadership vowed to consider EITC reform but kept the idea out of its major tax overhaul. With little apparent consensus among the Republicans on how to proceed, neither Republican congressional leaders nor the Trump Administration have come up with a plan.
My TPC colleague Len Burman has proposed a another way to supplement worker income (and encourage work): a fully refundable tax credit on the first $14,000 of a person’s wages. Len would finance the credit with a Value-Added Tax.
And, of course, there has been a strong push at the state and local level to raise the minimum wage, and support from many Democrats for a national $15-an-hour minimum wage.
Some researchers and policymakers in the US and abroad have proposed another idea—a universal basic income—where everyone would receive an annual payment from the government to support a minimum standard of living, whether they are working or not. Though the idea is being pushed by the political left, it is based on an idea promoted decades ago by conservative icon Milton Friedman. There is much debate over whether such an incentive would encourage, or discourage, work.
A federal job for all
A third stream comes from the far left. Sen. Bernie Sanders (I-VT) will reportedly soon propose a plan to provide a guaranteed federal job—paying at least $15 an hour plus benefits—to every American who wants one.
The timing of this debate is interesting. The US unemployment rate is at a historically low level of just 4.1 percent. However, politicians of both parties are focused on winning support of blue collar “Trump voters.” Many live in pockets of relatively high unemployment or underemployment and are themselves jobless or working for low pay. Yet, many are angry at what they see as government handouts to those they believe do not want to work. It will not be easy for policymakers to reconcile this inconsistency.
Will any of these policy ideas work? I am no expert in labor economics, but they raise many challenges.
Perverse inventives
Take the Trump ideas first: It is not clear whether American-born people will do the hard work many immigrants now do, at least not at the low wages on offer. At the other end of the labor market, there may not be enough qualified native-born workers available to fill all the jobs now being done by highly-skilled immigrants. Nor is it clear that any of these jobs would even be available in high-unemployment communities. Who, for instance, needs to hire construction workers in towns where there is no economic development? Or employ software engineers where there are no tech companies?
The Tax Cuts and Jobs Act does include some incentives for US domestic investment, such as sharply lower corporate tax rates and more generous depreciation rules. But it also contains international tax provisions that may have the perverse effect of encouraging some US firms to manufacture overseas, though they are promoted as doing the opposite.
The economic evidence on tariffs is strong—but it runs counter to the White House narrative: Trade barriers are more likely to raise consumer prices than boost domestic employment.
Beginning an historic debate
Will slashing the safety net for those who do not work encourage employment? Most of these receiving SNAP benefits and Medicaid already work, except for children, the frail elderly, and younger people with disabilities.
At the same time, it is hard to know how an idea like Sanders’ federal jobs program would work in a tight employment market. It has not been tried since the depths of the Great Depression and the evidence of its success then is mixed at best.
That leaves relatively modest ideas such as enhancing the EITC, an idea my TPC colleague Elaine Maag has proposed and TPC has analyzed. Or, more ambitiously, something like the credit-and-VAT Len Burman has proposed.
Given all the rhetoric about economic anxiety, we may be only at the beginning of what could become an historic debate over federal jobs policy.
