Making Work Pay – Again

September 15, 2008


One of the rallying cries of the welfare reform movement of the 1990s, coined by President Bill Clinton, but soon suffusing the entire movement, was “Make Work Pay.” So few words have rarely captured such a fundamental goal of social policy. Government could help millions of families working for low wages by supplementing their incomes with benefits, especially benefits designed to encourage work. Doing so would both improve the economic well-being of children and families, and increase the incentive to escape poverty and welfare dependency through work. Clinton’s primary idea for making work pay was to increase the Earned Income Tax Credit (EITC), which uses the tax code to make cash payments to low-income workers, primarily those with children. Clinton accomplished this goal in 1993 with legislation that substantially increased the EITC. Today the maximum EITC benefit is $4,500 for workers with two children – a level of benefit by which the federal government, in effect, converts an $8-anhour job to a $10-an-hour job.

But the EITC is only the most conspicuous of the programs that provide additional benefits to low-income workers. Taken together, these programs are often called the “work support system.” The primary programs in the work support system, in addition to the EITC, are child care, food stamps, and the combination of Medicaid and the State Child Health Insurance Program. Less often mentioned are the refundable portion of the child tax credit, child support enforcement, and employment and training programs. A family with two children with a parent earning $8 an hour and working full time can enjoy a package of earnings and work supports worth more than $37,000.

The wholesale abandonment of welfare during the 1990s for low-wage work augmented by benefits from the work support system has directly contributed to a substantial increase in earnings and income and to an impressive reduction in poverty among children in female-headed families. Indeed, a recent report from the Congressional Budget Office showed that between 1991 and 2005, families with children in the bottom fifth of the family income distribution enjoyed a greater percentage boost in income than families with children in all but the top quintile. Even after the recession of 2001 reduced the percentage of single mothers with jobs by around 2 percentage points, child poverty was still more than 20 percent lower than it had been before the explosion in employment by single mothers during the mid-1990s.

So the federal government and, to a somewhat lesser degree, the states have done a lot to advance the agenda of making work pay. The best way to achieve further reductions in poverty and to promote economic opportunity is to conduct a two-front war: one focusing on increasing the human capital of low-income workers, and the second on improving the work support system. As it happens, Congress now has an opportunity to adopt a major reform that would greatly strengthen the work support system, increase work incentive, promote economic opportunity, and dramatically improve the economic well-being of around 3 million households. A little less than half of these households have children, mostly living with their single mother. And Congress could achieve these outcomes without spending an additional dime of taxpayer money and without increasing the federal deficit. This reform offers the best opportunity for advancing the make-work-pay agenda over the next several years.

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