Working More to Earn Less | Why the Poor Stay Poor

Release Date
May 27, 2014


Poverty & Inequality

You may have heard the term “poverty trap” – the notion that the poor are stuck at the bottom. What if someone told you that our welfare system exacerbates this cycle by punishing the poor for working more? Prof. Sean Mulholland argues that this is happening every day. Well-intentioned welfare programs drastically decrease benefits at certain income thresholds—which in effect can make a breadwinner and his/her family worse off when they start earning more. Sound absurd? That’s because it is.

Have questions? Ask Prof. Mulholland yourself during a live Q&A on Thursday June 5th. Register for it here.
1) Welfare’s Failure and the Solution (white paper) Gary D. Alexander of the American Enterprise Institute goes over the hard data of poverty traps, the lack of transparency, and the chaotic structure of our welfare system.
2) Kids May Stay On Disability If Their Parents Rely On The Check (podcast) Planet Money takes a look at how families are affected by disability benefits
3) Welfare Debate (debate) Thomas Sowell and Pennsylvania Secretary of Welfare, Helen O’Banion debate the merits of welfare
4) High Implicit Marginal Tax Rates Make Life Difficult for the Poor (blogpost) The Tax Foundation highlights an interview with a welfare recipient describing the problem of working more to earn less
5) Taxing hard-up Americans at 95% (article) The Economist reviews the evidence on how, with an effective marginal tax rate of as high as 95 percent, welfare support can discourage work
6) The Work versus Welfare Trade-Off: 2013 (article) Michael Tanner and Charles Hughes write for the Cato Institute on the trade-off welfare recipients face in deciding whether to work

Working More to Earn Less | Why the Poor Stay Poor
Sean Mulholland: What if I told you that the government effectively punishes poor people for working? Sound too sad to be true?
Let me tell you a story. I once had a student who interned at Florida’s welfare program for low-income families. One day, a distraught mother and her teenage son came into the office. Their benefits had been cut. And they were unable to pay their bills. And she didn’t know why.
My student searched and searched to figure out why this was the case. And he made an unsettling discovery. It turns out that the teenage son had worked additional hours at his part-time job. He had been doing good work. And his boss extended the number of hours. And this allowed the teenage son to bring home more income to the family.
But that little bit of extra money reduced the public assistance that the family was eligible for. In fact, the cut was so deep that those extra hours worked actually lowered the total income the family had to live on.
This is a horrible situation, one faced by millions of families. Instead of experiencing a gradual decline in benefits as their earnings increase, the government abruptly strips the benefits away. It punishes them for working.
Now imagine if you and your family were struggling financially. And you had the opportunity to work additional hours or take a job. But in doing so you would actually make your family worse off.
How would you respond to these perverse incentives? You’d likely scale back on the number of hours worked or not take the job. While individual programs attempt to reduce benefits gradually, they often do so at the same time. And this can result in a large, abrupt reduction in benefits. At times, individual programs also have abrupt, sudden declines in benefits.
Take, for example, the federal food stamp program, SNAP. For a parent with two children, the benefits are gradually reduced as earnings approach $30,000. But once the parent earns over $30,000, the benefits suddenly drop.
This is crazy, whatever you think about public assistance for the poor. We can all agree that this is the wrong way to do it. People should be rewarded, not punished, when they work. The welfare system is so poorly designed that it is trapping many people that it was created to help.
My name is Sean Mulholland, professor of economics. And I believe there are ways to fix the system. If you’d like to learn more about these issues and explore potential alternatives, please join me for a free online program at Learn Liberty Academy. Please click here to register. I hope to see you there.