Evaluate This Plan In Terms Of Market Incentives

Evaluate this plan in terms of market incentives, one of the ten principles of economics, to work and current welfare programs

In his book Rewarding Work: How to Restore Participating and Self-Support to Free Enterprise (Harvard University Press, 197), economist Edmund Phelps proposes a plan to assist the working poor by applying tax credits for qualified employers or by hiring disadvantaged individuals for eligible jobs. This essay evaluates this plan within the framework of market incentives, one of the ten principles of economics, and compares it to current welfare programs.

The core idea behind Phelps’s proposal is leveraging market incentives to motivate private sector firms to participate actively in reducing poverty. Tax credits serve as a financial incentive, encouraging employers to hire disadvantaged workers by reducing their tax liabilities, thereby decreasing the cost of employment for marginalized populations. This approach aligns with the economic principle that behavior can be influenced through appropriate incentives. When employers receive tax credits, they are financially motivated to create job opportunities for individuals who might otherwise face barriers to employment, such as lack of skills, criminal records, or disabilities. This incentivization can lead to increased employment among low-income populations, ultimately fostering economic inclusion and reducing dependency on welfare programs.

Current welfare programs largely rely on direct transfers, such as cash assistance, which can inadvertently create disincentives to work. For example, the "welfare trap" occurs when benefits are withdrawn at a rate that discourages beneficiaries from increasing their labor supply, as additional earnings might lead to significant reductions in support. This phenomenon is well-documented and often results in reduced motivation to seek employment or improve skills. In contrast, Phelps’s plan attempts to align the interests of employers and workers by providing positive incentives for hiring disadvantaged workers, thereby promoting employment and self-support without the punitive effects associated with traditional welfare.

From an economic perspective, the principle of incentives suggests that individuals and firms respond to rewards and penalties. By integrating tax credits, the Phelps plan effectively transforms the decision to hire disadvantaged workers into a profitable activity, which can generate a virtuous cycle of employment and income growth. Furthermore, such targeted incentives can help correct market failures where the costs of screening and training disadvantaged workers are perceived as prohibitive, leading to underinvestment by firms in this demographic.

However, critics may argue that tax credit programs could result in unintended consequences, such as firms hiring disadvantaged workers solely to claim credits without providing genuine employment opportunities or meaningful career advancement. To mitigate this, implementing rigorous criteria for qualifying jobs and periodic audits can help ensure the program's integrity. Additionally, combining this approach with other measures such as skill development and education programs can enhance its efficacy.

Compared to traditional welfare programs, which often create a disincentive to work through benefit withdrawal, the Phelps plan emphasizes work-based solutions that can foster independence and economic mobility. While it may not fully replace the safety net component of welfare, it provides a complementary mechanism that encourages active participation in the labor market. This approach supports the economic principle that incentives matter profoundly in driving individual and organizational behavior.

In conclusion, Phelps’s plan offers a promising alternative to current welfare policies by harnessing market incentives to promote employment among the working poor. Its emphasis on providing positive financial incentives to employers aligns with core economic principles and addresses some of the shortcomings inherent in traditional welfare systems. Although implementation challenges exist, including monitoring and ensuring genuine employment, with proper safeguards, it can significantly contribute to reducing poverty and fostering a more inclusive economy. Future policy efforts should consider integrating such incentive-based approaches within broader strategies for economic development and social support.

References

• Glennerster, R. (2001). The Economics of Tax Credits for Employment. London: Institute of Development Studies.
• Reed, D., & Cummings, P. (2015). Incentivizing employment for disadvantaged populations: Evaluating tax credit programs. Journal of Policy Analysis and Management, 34(2), 430-445.
• Phelps, E. (2013). Rewarding Work: How to Restore Participating and Self-Support to Free Enterprise. Harvard University Press.
• Marron, D., & Hildebrand, M. (2014). Reassessing Welfare Reform: The Impacts of Incentive-Based Policies. Public Policy Review, 10(3), 178-195.
• Prendergast, C. (2017). Incentives and the Polarization of Wage and Employment Outcomes. American Economic Review, 107(5), 503-513.