Many argue that welfare programs such as food stamp programs will often create additional unemployment. Now, a new NBER paper shows empirical evidence supporting this claim.
Labor supply theory makes strong predictions about how the introduction of a social welfare program impacts work effort. Although there is a large literature on the work incentive effects of AFDC and the EITC, relatively little is known about the work incentive effects of the Food Stamp Program and none of the existing literature is based on quasi-experimental methods. We use the cross-county introduction of the program in the 1960s and 1970s to estimate the impact of the program on the extensive and intensive margins of labor supply, earnings, and family cash income. Consistent with theory, we find modest reductions in employment and hours worked when food stamps are introduced. The results are larger for single-parent families.
Does this mean that the Food Stamp Program is a bad program? That it isn’t necessary? Not quite sure. One could argue that some of those individuals on the program desperately need the help regardless of those who could find jobs that may be leeching off the program. What this does tell me, however, is that the program is rather inefficient at aligning incentives.
There are ways in which some types of entitlement reforms could attempt to curb this effect. One of these ways would be to instead of using the money as direct food stamp payments, redirect the money in a way that creates jobs–either through subsidizing a company to create jobs or just creating government jobs. It would get those individuals on food stamps 1) off food stamps and/or 2) in the workforce. But the question becomes, “what is this the most economically efficient use of this money?”
My preferable method of creating jobs–and arguably the most efficient way–is to allow people to keep the money taken to pay for these entitlement programs. The money saved, invested, and spent would then be used to create jobs with far less bureaucracy involved. People could certainly donate to charities, although this again introduces a great deal more bureaucracy. But the bureaucracy of nonprofits is probably just as efficient, if not more so, than that of government.
Cross posted at Rational Conduct.