I used Labor Day to write my biweekly column for the Hoover Institution’s online publication Defining Ideas. Hey, that’s why it’s called Labor Day, right? So we can labor?
Here’s my Labor Day post, a day late.
Start with this quote from Phil Gramm and John Early, “Income Equality, Not Inequality, Is the Problem,” Wall Street Journal, August 29, 2022. (August 30 print edition.):
Real government transfer payments to the bottom 20% of household earners surged by 269% between 1967 and 2017, while middle-income households saw their real earnings after taxes rise by only 154% during the same period. That has largely equalized the income of the bottom 60% of Americans. This government-created equality has caused the labor-force participation rate to collapse among working-age people in low-income households and unleashed a populist realignment that is unraveling the coalition that has dominated American politics since the 1930s.
Our most significant finding from correcting the census income calculations wasn’t the overstated inequality between top and bottom earners. It was the extraordinary equality of income among the bottom 60% of American households, regardless of employment status. In 2017, among working-age households, the bottom 20% earned only $6,941 on average, and only 36% were employed. But after transfer payments and taxes, those households had an average income of $48,806. The average working-age household in the second quintile earned $31,811 and 85% of them were employed. But after transfers and taxes, they had income of $50,492, a mere 3.5% more than the bottom quintile. The middle quintile earned $66,453 and 92% were employed. But after taxes and transfers, they kept only $61,350—just 26% more than the bottom quintile.
I haven’t checked Gramm’s and Early’s numbers but they appear to be well-sourced.
The bottom line is that the welfare state in the United States is now so extensive that for people in the bottom 60 percent, work pays off at best marginally. We need to make work pay better. Not by dictating higher wages; we know the problems with that. But by paring down the welfare state.
Note: The one thing I wonder about their numbers is how they account for spending on in-kind government welfare programs like Medicaid. Finkelstein, Hendren, and Luttmer found that Medicaid recipients value a dollar of Medicaid spent on them at only 20 to 40 cents. If Gramm and Early valued the Medicaid at $1 of benefit to the recipient for $1 spent on the recipient, they would be overstating the income of the bottom 20 percent. That would mean that the gap in income between the bottom quintile and the next two quintiles would be higher than their numbers show. However, it should be noted that one reason Finkelstein et al found such a low value is that “the uninsured pay only a small fraction of their medical expenditures. Put differently, if there was [sic] no Medicaid, this population would still receive some health care and would pay only a small share of its cost, likely due to the large amount of uncompensated care provided by hospitals.” So we might be back roughly to the dollar for dollar value of Medicaid spending, that I suspect Gramm and Early used, not being as big a problem as I first thought. Without Medicaid, they would still get a fair amount of medical treatment without working and being covered by health insurance.
The graph above is from their WSJ article.