One of the major problems with the welfare structure is that it requires funding in the form of taxes, debt, and inflation. The tax structure necessary to fund redistribution schemes naturally creates a Tax Dead Zone. What this dead zone does is create an income range where, after all taxes and benefits are accounted for, earning an extra dollar in gross income results in either no change or a reduction in net income.
Essentially, the extra dollar in earnings is taxed at 100 percent or more, penalizing the current recipient for attempting to exit public assistance. This dead space is nearly $20,000 in range, meaning that if the person estimates they’re unable to consistently earn above roughly $60,000 a year, it’s better to not try and to stick around $18,000 a year since the net benefit structure at $18,000 results in more resources to live on than at $45,000. It is mathematically impossible to design a welfare and tax structure that doesn’t, at some point, penalize a welfare recipient for earning more money.
Another insidious trap is the regulatory structure. People who are current welfare recipients tend to have few or no job skills. This is particularly true for younger individuals who haven’t had a first job yet. What the regulatory state does is drive up the cost of employment. When employment costs are raised, be it through a minimum wage or workplace rules, a higher skill level is demanded from the worker to generate sufficient revenues to justify the cost. If the applicant isn’t sufficiently skilled, they won’t get hired.
Unemployment can create a cycle of further unemployment in this environment. Since skills degrade over time, a person who elects to take twenty-six weeks of paid unemployment instead of a temporary lower-skilled role will be at a major disadvantage. Long-term unemployment becomes a trap, since the individual will no longer possess sufficient skills to cover the cost in wage mandates, taxes, and regulatory impositions of hiring them. If public unemployment benefits didn’t exist and the state didn’t artificially inflate the cost of employment, this individual wouldn’t have been lured into taking a six-month vacation and wouldn’t have struggled to justify the costs of their employment.
The impacts are particularly bad in terms of generational poverty. The minimum wage has a strong negative impact on youth employment rates. Teens who are unemployed enjoy significantly lower lifetime earnings and are more likely to be unemployed as adults compared to their peers who held a part-time job. This, in turn, leads to greater utilization of public sector benefits.
