Analysis: Ellenberg's homeless student payouts unlikely to change job market supply/demand
Wage subsidies. Citizen's income. GBI. Known by a trove of monikers, this proposition posits that supplementing people's salaries (e.g., with $1,200/month in SCC's unhoused HS grad program) keeps them out of poverty and encourages career success. But the Journal of Economic Issues' Robert E. Prasch begs to differ. He explains why income subsidies reduce employees' bargaining power and consumers' purchasing power, which amplifies unemployment.
According to Phelps and others, a policy of wage subsidies would support the social virtues that emerge from greater labor market attachment among marginalized members of the community while generating positive externalities for the larger society in the form of less crime, homelessness, drug use, and so on (Phelps 1997, 126-128). Because his proposal is in keeping with the neo-liberal ethos of our era, it has found a broad and sympathetic audience among policy elites, and especially among professional economists. The rest of this paper will reassess the case for wage subsidies by reviewing several assumptions that must hold if the argument is to succeed. In addition to the points surveyed below, it should be noted that other problems, particularly administrative ones, exist and are not denied by proponents (Phelps 1997, 114-115). However, there are essentially six crucial assumptions whose probable failure undermine the case for the proposed policy....
Fifth, the policy presumes that employers' decisions to expand employment are primarily a "supply side" concern about the cost of compensating employees rather than a function of actual, or anticipated, demand for their products. The original point of John Maynard Keynes' work was to demonstrate that unemployment could exist and persist in a free market economy with fully flexible wages and prices (Keynes 1936, ch. 2-3, ch. 18-20; Davidson 1994, ch. 11; Chick 1983, ch. 7-8). Specifically, Keynes argued that under a plausible set of circumstances, a general reduction in the level of wages could set in motion a series of events that could result in a diminution of aggregate demand and thereby the level of employment. In this sense, a wage subsidy, if it results in a decline in the general wage level, could, through the income-multiplier, exacerbate the low-employment situation that existed before the policy was enacted.
The reason is as follows: if a policy of wage subsidies further reduces the bargaining power of labor, it could result in a further diminishment of the purchasing power of the aggregate of consumers, which could feed back on producers' expectations, which would, in turn, further reduce the level of output and investment, and therefore employment, despite the availability of a wage subsidy. According to the German emigre economist, Gerhard Colm, something akin to the above set of events undermined the only large-scale experiment with a policy of wage subsidies, the "Papen Plan" in Germany that lasted from September 1932 to April 1933. Colm reported that while this policy was in place the number of unemployed, which the government predicted would be reduced by 35 percent to 40 percent, actually increased by 15 percent (Colm 1934).
This article originally appeared in the Journal of Economic Issues. Read the whole thing here (paywall).
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