Reward and Facilitate Work

Jason Furman
Jason Furman Aetna Professor of the Practice of Economic Policy - Harvard University, Nonresident Senior Fellow - Peterson Institute for International Economics, Former Brookings Expert

December 15, 2007

Although the overall economy has grown reasonably well in the last six years, the gains have not filtered down and the share of Americans in poverty has risen. If the economy hits snags, as has been forecast, the risks to America’s working poor will be tremendous. Besides the moral failure, poverty comes at a substantial national cost, with one recent estimate that it costs $500 billion annually. Smarter policies and expanded investments to reward and facilitate work could help realize the American dream.

For proof, look no further back than the striking success of policies in the 1990s to encourage single mothers to join the workforce and better reward them for their work Expansion of the earned income tax credit (EITC), together with welfare reform and other changes, dramatically catapulted single mothers into the labor force. Paychecks for families with children among the bottom fifth of earners rose 35 percent over this period.

But as low-income women with children were entering the labor force by the millions, the work rate among less-educated men fell. These failures not only directly impact the worker, but also indirectly impact the families. Many of these “childless” adults are men who have children but do not live with them. Many more are men who will one day have children. Young childless men are also more likely to commit crime than other poor individuals, adding to the culture of violence and drugs that permeates many poor neighborhoods. These men should respond to the same set of economic incentives that lifted women with children out of poverty.

The top priority should be expanding the EITC for childless workers. The maximum credit could be doubled or even tripled to better reward work, a step that was recently proposed by House Ways and Means Chairman Charles Rangel of New York. In addition, policy-makers should experiment with other measures to reward work. One possibility would be to provide workers in certain economically distressed areas with wage subsidies that make up half the difference between their actual wage and a target wage of $11.30 per hour.

Rewarding work, however, is unlikely to be sufficient. Many disadvantaged workers still have a particularly difficult time finding a job, especially one that pays well and utilizes their full potential. Another policy focus is to facilitate work through a range of services such as job search assistance, training, and child-care supports that help prepare workers and connect them with the best possible job. Some programs have had a major positive impact for their communities; others have been less successful, and the majority of programs have not been evaluated.

This suggests that policy-makers should follow a two-prong strategy. First, base their work on programs with a proven track record. One such program was the rigorously evaluated experimental New Hope program in Wisconsin in the 1990s. New Hope provided a bundle of services ranging from earnings supplements and health insurance to job search assistance and even community service jobs in exchange for a commitment to work at least 30 hours a week. As a result, employment rates for participants increased by 5 percentage points and poverty rates decreased by 8 percentage points.

Second, policymakers should rigorously evaluate training and job assistance programs and provide a model for successful models to spread. One possibility would be to spend $5 billion annually in federal matching funds for increases in state, local, and private expenditures on worker advancement initiatives. The money would be awarded through a competitive grant process, which together with evaluation and dissemination of results would provide an effective system both to help workers and learn better how to target this assistance.

Rewarding and facilitating work should be the centerpiece of an economic strategy to reduce poverty and help ensure that more workers are using their full potential. The best anti-poverty program is a job. Greater and smarter investments in these areas could usefully be complemented by a broader set of policies to prepare people to succeed, especially through education, and a more robust safety net that helps people rebound if they do experience economic hardship.