Why work when welfare pays more?

The Cato Institute recently released an updated version of a decades-old study analyzing welfare benefits on a state-by-state basis. The study, The Work vs. Welfare Trade-Off, found that the total value of welfare benefits continues to exceed the income that most recipients would earn from an entry-level job in many states. Since the original version of the Cato study was published in 1995, the total value of welfare benefits increased in 32 states and the District of Columbia, while 18 states saw a decline in the value of benefits.

One of the most significant findings in the study is the revelation that welfare currently pays more than a minimum-wage job in 35 states, and pays more than $15 per hour in 13 more states. Welfare benefits have also risen sharply in many states since the original 1995 study, with annual benefits increasing by $9,367 in Vermont, $7,265 in Hawaii, and $6,994 in New Hampshire. However, not all states increased the value of welfare benefits over the examined time period.  In Maine, annual welfare benefits declined by $8,865, and Virginia’s declined by $8,407. Overall the most generous benefits packages were found in Hawaii, followed by the District of Columbia and Massachusetts.

The authors deduced from their findings that these generous welfare benefits act as a disincentive for work. They found that in 11 states, welfare pays more than the average pre-tax first year wage for a teacher. Further, in 39 states it pays more than the starting wage for a secretary. Shockingly, in the 3 most generous states a person on welfare can take home more than an entry-level computer programmer. If an individual can still earn substantial wages without incurring the opportunity costs of time and energy associated with working for those wages, work will become a far less attractive option.  When those wages are higher than what could be earned from work, incentives are distorted even further away from work and towards dependency.

In addition to the fiscal damage that states incur from high levels of welfare spending, the current system is also damaging to the individuals who are subject to these perverse incentives. As the Cato study correctly points out, “one of the most important long-term steps toward avoiding or getting out of poverty is taking a job. Only 2.6 percent of full-time workers are poor, as defined by the Federal Poverty Level (FPL) standard, compared with 23.9 percent of adults who do not work.” This is likely due to the fact that in the absence of on-the-job training, valuable, employable skills either languish or cease to develop in the first place—putting these individuals at a significant disadvantage.

The authors of The Work vs. Welfare Trade-Off offer ways to mitigate the disincentive for work which include strengthening welfare work requirements, removing exemptions, and narrowing the definition of work. Coupled with the evidence presented in ALEC’s Rich States, Poor States Report, which demonstrates the economic success of states that spend and tax less, the lessons learned from The Work vs. Welfare Trade-Off illustrate the growing need for reforms in many states.