Ah, the holiday shopping season is upon us and with it comes renewed outcries against Black Friday shopping and one of the statists favorite whipping boys: Wal-Mart. Mixed in with the calls to boycott Wal-Mart, obstruct entrances with protests, or vandalize their stores by replacing signage are the usual complaints about the “low wages” offered by such big retailers, citing that significant (supposedly) numbers of employees have to rely on welfare to make ends meet. Usually such complaints are paired with calls for increases in minimum wage to $12 (or more) to provide a “living wage.”

Assuming that there actually is such a thing as “a living wage” and that it is higher than the wages Wal-Mart offers, which I think is unlikely, the question to ask is why are thousands of employees willing to accept wages that by definition they cannot live on? Given that a small minority of workers (just 3% according to Bureau of Labor Statistics) actually make just the federal minimum wage or less, and less than half of those live in poverty, there are any number of possible answers. Perhaps some employees work for Wal-Mart for extra “spending” money while others are students who don’t need to earn the full amount needed to support themselves. Another major reason is undoubtedly the existence of welfare programs.

Most people believe that welfare exists simply to provide a safety net for people when misfortune strikes. Few would argue, at least not publicly, that such programs are meant to be permanent or to provide all the comforts of a “middle class” lifestyle. They are also unlikely to see these welfare programs as a subsidy to business. Sadly they are often wrong on all these counts.

There have been numerous studies showing how much a person in various situations needs to make in order to make it rational for them to go to work rather than accept welfare. In Vermont for example you would need to find a full-time job paying just over $20 per hour (almost 3 times the federal minimum wage) to come out ahead in giving up welfare benefits. As you can imagine, such jobs are certainly few and far between in Vermont, or most states, especially for lower skilled people who are most likely to be on welfare. (This is leaving aside a discussion of the substantial disincentives to work provided by the means testing for various benefits.) All of this discourages individuals from working as much as they might otherwise want or improving their skills in seeking a better job. Under these conditions it is completely reasonable for people to remain on welfare even if this makes it impossible for them to become successful in their own right or achieve real prosperity. Obviously there is no guarantee of achieving any given level of success on your own, but it is certainly impossible to to do so if you are enmeshed in welfare’s poverty trap.

Beyond being poverty traps. government welfare programs are highly immoral. Those who receive welfare payments become trapped in the system and their self-esteem and pride, which come primarily from productive work, are undercut. Those who pay for these programs through taxes levied against them are essentially robbed by the government. No rational person would tolerate or forgive a bank robber simply because he claims to use the money he steals to help the disadvantaged, yet this is exactly the situation that exists with government welfare programs. Just as it would be wrong for an individual to do this, it is equally wrong for  the government to do it.

If you have ever bought a cell phone at a steep discount by agreeing to a two-year contract, bought a Kindle e-reader, or razors and razor blades then you have encountered what is often called (after the last example) the “razor/razor blade model” in marketing. This is a situation where a company sells a good for little or no profit, often a loss, but make up for this lost profit by selling other associated goods. In all these cases, the companies selling them could not remain in business on what they make by selling the first product, but more than make up for it in sales of the thing that actually makes the product useful: e-books, razor blades, service contracts, and etc.

The same principle holds true for an individual, with welfare programs often acting as the “razor blades” to the “razor” of their job. Knowing that there is another source of income outside their job allows an individual to accept pay that is lower than would otherwise be possible and or neglect to develop the skills needed to earn more. This also acts as an indirect subsidy to businesses who need not bear the total cost of their employees, instead shifting a portion of it on to the entire body of tax payers. In the absence of the welfare programs, the upward pressure on wages would be much greater until something approximating a true “living wage” was reached, just as cell phones without a contract require higher prices.

The solution to this is not to increase the minimum wage to the level of the “living wage,” however. A study by the Agriculture and Resource Economics department at University of California, Berkeley in 2001 found that a 10% increase in minimum wage actually led to a decrease in the overall welfare of low-income workers due to the perverse incentives of the welfare system. The real answer is to begin to unwind the immoral and destructive welfare system, getting rid of the minimum wage and other regulations, and in the process lower taxes. This would restore proper incentives to employees and at the same time, by reducing the costs to business, result in higher wages and lower the amount that is needed for an actual “living wage.”