Reforming welfare around workers

Dean Baker

The global economic crisis will have consequences at all levels of society, yet it is the most vulnerable who will be least well-equipped to cope. Governments must be bold in reorienting their policy agendas for the benefit of these groups. The following measures should be an important part of any progressive welfare reform agenda:

Sustain full employment
The first principle of progressive welfare reform must be to strive for genuine full employment. It will be impossible to sustain an acceptable level of social welfare benefits if a large portion of the population is unemployed. The burden on public budgets will be too large. Sustaining full employment will require aggressive use of fiscal and monetary policy. The latter will require that many central banks abandon their focus on inflation targeting. Low rates of inflation are desirable, but there must be a trade-off against the costs of higher unemployment. The single minded focus on sustaining low rates of inflation to the exclusion of other concerns is recipe for disaster.

Restrain the costs of health care
Health care, which is especially expensive in the US, is a substantial burden to populations everywhere. Any adequate welfare package must therefore include access to quality health care, but it will be very difficult to fund health care for large segments of the population if costs grow unchecked. Governments should thus seek to eliminate or reduce the barriers which raise the cost of health care. Most importantly, this will mean tackling patent protection for prescription drugs. Prescription drugs account for the fastest growing area of health care costs in the US and many other countries. This growth is almost entirely due to patent monopolies. In the US, the gap between patent protected prices and monopoly prices is approaching 2 per cent of GDP. If drugs could be sold at their competitive market price, they would be relatively cheap in almost all cases. More efficient mechanisms for financing prescription drug research, medical supplies and medical devices will also radically reduce their cost. If governments can effectively restrain the cost of health care, then assuring access to the entire population will be an affordable goal.

Provide access to benefits for low-wage earners
Welfare benefits should not be disincentives to work. Rather, programmes should be designed so that benefits can be taken as a subsidy for work that is eventually phased out as income rises. By allowing low-wage earners to draw welfare benefits, governments will both encourage work and reduce the risk of creating a permanent group of welfare recipients. Creating a class of dependent people who are distinct from the working population is degrading to those affected and is likely to undermine support for government welfare programs. The earned income tax credit in the US is an example of a policy that effectively allows low-wage earners to benefit from subsidies.

Maintain high minimum wages
Labour market policies should be designed in ways that increase wages for those at the bottom end of the wage scale. One obvious vehicle for raising wages for less-skilled workers is the minimum wage. Governments should maintain high minimum wages. A target of half the median wage, for example, would be reasonable.

Promote high skilled immigration
Immigration policy is also an important factor affecting the wages of less-skilled workers. Most wealthy countries have de facto immigration policies that place their least-skilled workers in direct competition with immigrants from the developing world, who are often willing to accept very low pay by wealthy countries’ standards. In contrast, formal and informal barriers largely protect higher-skilled workers from competition with their counterparts in the developing world. The predicted and actual result of this one-sided protectionism is to lower the relative wages of less-educated workers in wealthy countries. As an alternative, immigration policy can be designed to reduce the relative wage of more skilled workers by promoting the immigration of highly skilled workers from the developing world, thus leading to benefits for the less-skilled workers as well. To ensure that developing countries also benefit from this policy, wealthy countries can make payments to the home countries of immigrant workers to offset the costs of their education and training.

Dean Baker is co-director, Center for Economic and Policy Research (CEPR)