Is Anti-Poverty Spending Subsidizing Low-Wage Employers?

by Reihan Salam

Recently, the National Employment Law Project (NELP) released a report arguing that low-wage fast-food employers are effectively being subsidized by anti-poverty programs:

According to a study by researchers at the University of California-Berkeley, more than half (52 percent) of front-line fast-food workers must rely on at least one public assistance program to support their families. As a result, the fast-food-industry business model of low wages, non-existent benefits, and limited work hours costs taxpayers an average of nearly $7 billion every year. While payroll data for individual fast-food companies is not publicly available, we estimate that the low-wage business model at the 10 largest fast-food companies in the United States costs taxpayers more than $3.8 billion each year. As the largest employer in the fast- food industry, McDonald’s alone costs taxpayers nearly twice as much as its next-largest competitor, Yum! Brands.

Andrew Biggs of the American Enterprise Institute examines the NELP’s thesis at RealClearMarkets:

One possibility is that fast food chains pay the same wages regardless of the government benefits their employees may qualify for. This doesn’t seem unreasonable, given that fast food establishments paid low wages even before government benefits were prevalent. Moreover, in some cases — such as the restaurant chain Sonic — restaurant employees receive government benefits far exceeding the chain’s own profits. Even if Sonic ran as a non-profit — or at a loss — it could not free itself from NELP’s assertions that the chain is bilking taxpayers.

In this case, the fast food-bilks-the-taxpayer allegation is simply false and all the data surrounding it is meaningless. If the government chooses to supplement the wages of low-skilled workers, it cannot then turn around and accuse those workers’ employers of fleecing the government.

Alternately, it is possible that fast food employers are able to “capture” part of the federal benefits paid to their employees. As benefits for the working poor are introduced, fast food restaurants might lower the wages they offer to employees, either consciously or simply due to the growing supply of low-skilled workers drawn into the labor force by benefits such as the EITC.

This seems like the most likely scenario. Princeton economist Jesse Rothstein has observed that EITC-induced increases in labor supply might lower wages, shifting the intended transfer towards employers and harming the interests of non-EITC less-skilled workers, e.g., less-skilled men who aren’t custodial parents. But the notion that EITC-induced increases in labor supply might benefit employers doesn’t mean that employers capture all of the benefit, as Biggs explains:

Mathematically, the only way for fast food chains to truly “cost” the government the $3.8 billion that NELP claims, is if these restaurants cut wages dollar-for-dollar as government benefits for employees rise.

The really interesting question arises if we assume that the NELP is right that employers capture all of the benefit of the EITC and other means-tested transfers:

If NELP is right, though, that has important implications for how we view the welfare state. For instance, a dollar-for-dollar offset implies that federal transfer programs drive down working-class wages, since the higher benefits rise, the more wages fall. Thus, according to NELP’s logic, it is federal government policy that lies behind working-class wage stagnation in recent years.

This same logic also suggests that the hundreds of billions spent over decades on social transfer programs for the working poor have done nothing to raise the standard of living of beneficiaries, since every dollar is skimmed off by Ronald McDonald and the shareholders he fronts for. Many conservatives might be willing to accept and tout these conclusions, but it is curious to find them emanating from left-leaning groups. Yet that is precisely what the NELP report implies.

Indeed, Patrice Hill of the right-of-center Washington Times published an article earlier this week that gives pride of place to the fast-food-bilks-the-taxpayer charge. Biggs offers an alternative view:

NELP should be discussing the major causes of low wages — poor skills, caused by weak schools and even weaker family structures. Simply put, many adults are today trying to support families in jobs that we’ve traditionally assumed pretty much any teenager was skilled enough to perform. Instead, the NELP study presents a villain (literally) in a clown suit, arguing that if only government were large enough and brave enough to vanquish it, everything would improve immeasurably. The NELP study is perfectly designed for press coverage and already is making the rounds through social media. But it is also is a perfect example of how today’s discussion of public policy issues can distract rather than inform.

A fairly common view among policymakers is that wage subsidies (like the EITC) and minimum wages are complements — a statutory minimum wage can limit the extent to which employers capture the benefits of a wage subsidy, yet wage subsidies can raise living standards for workers who might not be employable if the minimum wage is set at too high a level. Getting the balance right is difficult. My inclination is to place a heavier emphasis on wage subsidies than on minimum wages, as my sense is that it is becoming less attractive for firms to employ less-skilled workers over time, even at very low wages. Moreover, I see EITC-induced increases in labor supply as a feature rather than a bug, as participation in the labor market can facilitate upward mobility and social inclusion. But if we’re going to have wage subsidies, some kind of wage floor seems like reasonable complement.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.