This year's budget agreement is good news for employers of low-wage workers: They'll pay even less for labor.
The agreement calls for an increase in the earned income tax credit for families with children, an insurance credit and a young child credit - all of which will increase the incomes of families of the working poor temporarily.But competition for jobs will enable employers to offer less and still obtain the quantity and quality of labor they want.
If workers were willing to work for a given wage before the credits they will be equally willing to work for a lower wage plus the credit. You can't hide that from employers or the labor market.
All this is known to economists as the "Speenhamland effect," named after an attempt in southeastern England in the late 18th century to reduce poverty among the working poor by paying "supplements in aid of wages" out of tax revenues.
The policy wasn't applied widely, but its chief effect where and when it was applied was to pull money wages down. The United States in the late 20th century won't escape that result.
The downward pressure on wages for low-wage workers created by the Speenhamland effect will be reinforced by the recession and immigration. We will soon find that real wages for low-wage workers will be no higher than before the new credits, money wages will be lower and a subsidy to employers of low-wage workers will be paid by taxpayers.
Employers of low-wage labor will have even less incentive to invest in labor-saving technology or restructure their enterprises to increase productivity. Indeed, the incentive to substitute low-wage labor for capital will increase as the trade-off between labor and capital shifts to labor.
We can expect a decline in overall productivity in the low-wage sector of the economy. We can also expect the pauperized sector of the economy to be even more difficult to eradicate. We are tightening the knot that fastens that albatross around our neck.
The key to eliminating poverty is higher wages, not lower. Our national policy should be to increase the $3.80 minimum wage (horrors!) gradually and extend its coverage (more horrors!) until a worker employed at that wage is able to support a family of four at or above a realistic minimum level of health and decency. This will shift the trade-off between low-wage labor and capital in favor of capital and increased productivity - exactly what the economy needs.
Such a shift may well be traumatic, but the trauma can be alleviated by training programs for workers, tax incentives for employers and programs to ease the transition. Much of this could be paid for by funds shifted from welfare, food stamps and wage supplement programs, as well as by income taxes paid out of the higher earnings of the workers affected.
Above all, we have to stop thinking like an economist with the House Ways and Means Committee, who was quoted after the budget deal as saying: "The working poor were made better off by this agreement than by any other piece of legislation passed in the 1980s."
Nonsense. Wage supplements worsen the basic problem; they don't solve it.