By Erik Craft
During the past few months, some of my smart progressive friends have claimed that large firms that hire low-skilled workers are being subsidized by the federal government. First it was Walmart; then it was Amazon. The argument is that many of their workers qualify for food stamps and other welfare, and, therefore, these firms are actually costing taxpayers money.
The logic seems obvious. If the firms paid higher wages, then the workers would not qualify for as much assistance. Therefore, the firms pay lower wages, and the government picks up some of the reduced income by providing government benefits. Firms save money, and federal government expenditures rise.
This argument is confused. To determine the effect of government assistance or welfare on wages and company profits, we have to ask what would happen in the absence of such assistance or if the assistance were reduced. How do welfare programs affect the labor supply of such workers?
Does government assistance increase the supply of low-skilled, low-income workers? If more persons want to work on account of the government payments, then market wages will be driven lower. If fewer persons want to work, market wages will be driven higher.
Most welfare payments make it marginally easier to survive without income, thereby slightly reducing incentives to work. This implies a lower supply of low-skilled workers and higher market wages for their employers. In this case, the existence of such welfare raises wages and lowers profits for Walmart and Amazon.
(As Gary Burtless of the Brookings Institution notes, one exception is the earned income tax credit, which is a form of government assistance for which one qualifies only by working.)
So to the extent that most government assistance for low-income persons is available without working, such policies slightly reduce incentives to seek jobs or work longer hours, lowering the labor supply, and raising wage rates.
Perhaps what really drives my progressive friends to believe that Walmart and Amazon are being subsidized — or that the situation is unethical or unjust — is the concurrent occurrence of large size, low wages, and significant profits. The argument is that any successful company should be paying its workers enough that they do not qualify for welfare.
This is not a question of analyzing supply and demand accurately, but rather a larger philosophical claim.
The idea seems to be that firms, not the larger society, are responsible for the material comforts of their workers. Once one hires a worker, one has the responsibility for giving that worker and family a decent standard of living.
The implications of this view are in conflict with an efficient economy.
Firms would have to choose between (1) no employment of low-skilled workers or (2) providing higher-than-market-equilibrium wages and benefits. The result would be reduced employment, felt most heavily by the youngest and others whose backgrounds gave them the fewest skills.
This question might be contemplated more rationally if we move from large employers to a standard employer. Is it the employer’s responsibility to solve a worker’s income challenges regardless of the worker’s productivity? Or do employers help society most by allocating resources in a manner that maximizes output, with government working to align the employers’ incentives with the public good and to address social problems?
Government does this by forcing firms to take into account the full costs of their behavior, by regulating activities that create pollution and affect persons beyond their employees and customers (what economists call externalities).
Government can also work to raise the productivity of workers though better education. And to the extent that there are persons who are less productive than others and therefore earn less, we as a society through government can take responsibility for the care of such persons.
To the extent that society shifts collective responsibility from the government to firms to solve social problems like poverty, we might achieve inefficiency in both production and assistance. To return to one program noted above, economists often encourage the expansion of the earned income tax credit. It both encourages employment of low-skilled workers and raises their incomes.
There are other reasons to discuss Walmart and Amazon critically. Perhaps the cost savings to low-income families at Walmart are offset by the reduction in neighborhood variety. Subsidies to attract Amazon facilities likely only relocate facilities rather than lead to efficient economic growth. Regulators do need to keep a watchful eye that these large firms do not grow so powerful that they prevent future efficient competition.
But Walmart and Amazon are hurting neither low-wage workers nor taxpayers by offering to employ so many of them.