Let's Talk About Food Stamps

As we can see from this Huffington post article, food stamp usage is at a record high.  The article talks about how food costs are increasing, and that food banks are low on food.  This has lead more people to go to the government for help.

The comments at the bottom of the article were more interesting than the article in my opinion.  I have come to the conclusion that large companies, like Wal-Mart, do not want the government to slow down or stop their subsidies.  I have heard that Wal-Mart uses programs like food stamps to help subsidize their wages to their employees.  It is difficult to raise a family when making $8 an hour; however it is much easier to raise a family making $8 an hour when you are collecting food stamps and government healthcare.  

The question I would like to ask is, "Are these government subsidies helping or hurting?"  Some might think these programs help the families that receive them because Wal-Mart just doesn't pay enough.  I think that Wal-Mart doesn't pay enough because they don't have too.  The solution in my mind is to end the subsidies.  If we ended these government supported entitlement programs, Wal-Mart would be more likely to increase their wages because their employees would demand it.  As long as their employees are making do, they will not put as much pressure on their employers.  

It seems cold to want to take away food stamps.  Maybe the solution is not to completely end the program, but to make it a very temporary solution.  As long as we subsidize employees’ wages, they will be complacent.  If they are complacent, they will stay in a Wal-Mart job for 10+ years making $10 an hour and complain the whole time. 


Dave Tufte said...

Dillin: 100/100.

Oooh ... I'm not sure I buy this argument at all. This seems like warmed-over Marxism to me.

Firms like food stamps because they help support their workers? Oh, spare me. I don't think I've ever heard that position from a manager or owner who actually pays people. Marxists used to talk about how a "reserve army of the unemployed" was used by capitalists to keep workers in line. Now its a reserve army of taxpayers, funding food stamps, that keeps their employees complacent???

Firms don't pay enough because they don't have to? This, again, smacks of a Marxian technique of choosing between general and partial equilibrium analysis as convenience suits. Wouldn't this have other symptoms? Like, say, high profit rates and high ROI or ROA? None of those is present in Wal-Mart or other big box retailers. But, if you only look at part of the problem, you wouldn't even see this.

For my part, I don't think a lot of people need encouragement to be complacent, to work in dead-end jobs for long periods of time, and all the while to complain about both. If anything, this seems like normal behavior; it would be unusual if this didn't happen. You know ... baaa, baaa ;)

I don't want to come across as pro-stamps (I think we do too much of this). But, I'm curious if Dillin is serious or satirical here? Dillin: 1) if you were a manager, would the strategy in your first paragraph be something you'd practice, and 2) would you not pay enough because you didn't have to or because you couldn't afford to?

Dillin said...

I just looked up how to qualify for food stamps in Utah. In a family of four you could qualify for about $670 a month in food stamps if you brought in gross less than $2500 a month. That means that if one parent was working 40 hours a week and the other not working the parent working could not make more than about $14.50 if they wanted food stamps. If both parents worked part time jobs and made about $9.60 an hour working about 30 hours a week each, they could still qualify for the $670 a month in food stamps.

You can't tell me that large firms don't know these cut-offs. I don't think that executives sit around and plan how to take advantage of social programs, but I do think that one of the reasons that wages have stayed just below the poverty line is because if they go above it, they lose benefits. Of course people at large firms know this.

Qualifying for food stamps is like a 20% raise for the employee that the firm did not have to directly pay. Also, if the firm is good enough at dodging taxes, that raise is payed by someone else or by government debt. If we look at the parent making $14.50 an hour, they would have to get a raise of $2.90 an hour just to cover the loss in food stamps. That is a large negative incentive. This doesn't include all the other government social programs.

As a manager I have never planned for this to happen. I have heard of employees asking for a pay cut in order to qualify for government aid though.

My overall point is that sometimes we think that we are helping people by giving them government aid, but in reality we are just suppressing them.

BTW, don't grade my spelling or grammar, class is over. =)

Dave Tufte said...

Promise I won't grade you're writing!

Let's take your position that this happens at face value. If it were true, I think there's three things to look for.

One would be multimodal behavior in the cross-section of wage rates. In short, if there's a threshold where welfare benefits phase out, you'd see fewer people paid just above that level, and more paid just below that level. I know of no literature that supports this. However, there is a similar issue in corporate finance with the reporting of corporate earnings (which are often just above some threshold). There are a lot of techniques available to study this, so it isn't like it couldn't be applied to wages.

Second, what matters to the manager of the firm is the compensation of the employee not the wage. Compensation includes all the explicit and implicit benefits that wouldn't be "visible" when applying for welfare. Again, if there was a threshold where benefits began to change, you'd see a change in the distribution of wages versus non-wages around that threshold. Again ... no evidence that I know of to support that.

Third, if managers were actually doing this, how would they behave if government policy changed those welfare thresholds? What we'd expect to see is a lot of scrambling by managers after the thresholds changed. Again, there's no evidence of that.

Having said all this, I agree that there is quite a bit of evidence that workers may actually manipulate their compensation to manage those welfare thresholds.

All of this is related to emergent behavior: the idea that certain patterns become visible in macro data because of unrelated and underlying micro decisions. What's important here is that emergent behavior looks planned ... but it isn't. One of the hard parts of doing empirical economics is figuring out ways to discern the difference between patterns that are the results of actions, and those that are the result of emergent behavior.

Dr. Tufte said...

Here's another piece of the puzzle:

"Wal-Mart's critics also paint the company as a parasite on taxpayers, because 5 percent of its workers are on Medicaid. Actually that's a typical level for large retail firms, and the national average for all firms is 4 percent. Moreover, it's ironic that Wal-Mart's enemies, who are mainly progressives, should even raise this issue. In the 1990s progressives argued loudly for the reform that allowed poor Americans to keep Medicaid benefits even if they had a job. Now that this policy is helping workers at Wal-Mart, progressives shouldn't blame the company."

This is from a Sebastian Mallaby column at The Washington Post.

Bob said...

This is an interesting topic. I had never really considered the effect of food stamps on wage rates. It draws an interesting parallel to the potential impact of the Affordable Healthcare Act (Obamacare). Companies that meet certain thresholds (number of employees, etc) must offer “affordable” health insurance benefits to full-time employees. Generally speaking, an employee is considered full-time if he/she works at least 30 hours per week. This requirement is actually incentivizing companies to limit their employees to 29 hours per week and then encourage the individuals to apply for subsidies from the government to self-insure. Some (I have heard this phrase from two different insurance agents) refer to this rising group of employees as “Generation 29ers.”

Besides impacting health insurance coverage, what are some of the other economic impacts of the “29ers”? It creates a dilemma in the individual’s mind about whether to try and live off of 29 hours of wages per week or to have another part-time job. Will this lead to cuts in other benefits such as retirement or paid-vacation? Will the individuals in this situation just live off of part-time wages? This could lead to a few different consequences, from less disposable income to more governmental aid, such as food stamps.

Dave Tufte said...

Bob: 50/50

I think your point is better taken than Dillin's original post about food stamps.

Dillin was asserting that availability of food stamps from the government (which don't enter the wage bill of the firm, and therefore are not part of COGS) somehow affect management wage setting. I'd be very surprised if a manager would care, and it certainly wouldn't be profit-maximizing for them to do so. I could see a government bureaucrat looking at the privately set wages though, and concluding that such-and-such wage would be a good cut off point because it's a fairly common wage.

But Bob's point is very different. Obamacare is directly affecting the wage bills of firms. I would absolutely expect managers to pay attention to this, and it seems like the 30 hour cutoff is making them do just that.