REWARDING WORK: HOW TO RESTORE SELF-SUPPORT TO FREE ENTERPRISE
Edmund S. Phelps
Harvard University Press, 1997, ix + 198 pgs.
Edmund S. Phelps is no right-wing extremist. Quite the contrary, he stands at the center of
Keynesian orthodoxy in economics. Often termed an "economist's economist," he is most
famous for his work on the natural rate of unemployment and for his structural account of
In Rewarding Work, Mr. Phelps risks his reputation as a guardian of the establishment: he
almost, but not quite, kicks over the dogmas of the welfare state. Fortunately for those of an
Austrian bent, his proposals can easily be fixed so that they conform entirely to classical
As free-market advocates see matters, the welfare state cripples market incentives. Why
work, if you can get as much, or in some cases more, by idling on welfare? From Herbert
Spencer and William Graham Sumner to Henry Hazlitt, classical liberals indict welfarism as a
subsidy for voluntary unemployment.
The conventional wisdom brushes aside this view as extreme and hardhearted, but our author
views things differently. "[T]he welfare programs that are not work-related, such as Medicaid
and food stamps, devalue work and thus reduce job attachment. Means-testing intensifies the
impact.... Wage earning and job holding are now dwarfed by the welfare system. Welfare pays
more than work for the mothers eligible for Aid to Families With Dependent Children (AFDC)
and the train of benefits that follow from it" (p. 99).
But, defenders of the present system will allege, what is so bad about this? Surely the United
States is a rich society: can we not afford to provide for the less fortunate? Only reactionary
ideologues could object. Do not such benighted figures as Mises and Rothbard, who condemn
welfare, elevate property rights above human rights?
Mr. Phelps, amid a few disclaimers, allies himself with the reactionaries. Work is essential to
a person's well-being: absent gainful employment, one's life is liable to be dreary and futile.
"One of the most important rewards in most jobs is mental stimulation. They present a continual
series of exercises in problem-solving.... Of course mastering the simplest jobs will generally be
less of a learning experience than a career in the most complex and demanding jobs. Jobs do not
all have to provide a mental workout, though, to sustain the main point.... The reflections of
people in humble lines of work show that they learn much from their work and from its school of
hard knocks" (p. 11). This passage, by the way, is an excellent short rebuttal of Marxist cant
about "alienated labor."
To a classical liberal, the indicated course of action is simple-eliminate the welfare state.
Then, those formerly on welfare will be able to attain the benefits of work which our author has
so ably described. Absent a premium for idleness, what alternative do they have to the bracing
discipline of employment?
No, says Mr. Phelps, people who argue in this fashion overlook a key point. You gain the
advantages for living which a job provides only if the job pays adequate wages. Unless you have
enough money to support yourself and your family in a decent manner, employment will not end
the futility of your life. Precisely here arises the point at which Mr. Phelps dissents from the
views of classical liberals.
Mr. Phelps holds that there is no reason to think that, in present circumstances, the free
market will provide a living wage for unskilled workers. During the nineteenth century, land was
readily available. "Labor was so scarce that all hands were of considerable value in gaining a
foothold on the new land" (p. 2). But this fortunate situation no longer obtains, and the lot of the
contemporary unskilled is not a happy one.
Our author offers a wide range of data to support his claim that the unskilled do not earn
enough for a decent life. These data I shall lazily leave to readers to evaluate for themselves. But
my failure to discuss this part of Mr. Phelps's case is not entirely due to laziness. Rather, as it
seems to me, a crucial wrong assumption invalidates much of his argument.
Mr. Phelps purports to be arguing that unskilled workers do not earn enough for a decent life.
But much of his discussion concerns whether the wages of the unskilled have kept pace with the
pay of abler workers. To show that they have not does not suffice to establish what Mr. Phelps
needs for his argument against the market. Inequality and lack of wages adequate for a decent life
are two very different things.
But suppose that Mr. Phelps is right: what can be done? Our author is too good an economist
to recommend an increase in minimum wages. An increase of the minimum wage to "a
sufficiently high level is bound to decrease employment: all the affected workers would be priced
out of the market. No economist I know of has suggested that wage rates of $4 an hour might be
pushed up to $7 by means of a hike of the minimum wage without causing a major decline in
employment among low-wage workers" (p. 146).
Although this argument is too deep for the likes of Robert Reich, it is of course elementary
and hardly news. Much more significant, to my mind, is that Mr. Phelps also rejects
governmentally sponsored job-training programs to "educate" the unskilled to a higher calling.
"It shows a profound lack of understanding of capitalism to suppose that outsiders can anticipate
the training that entrepreneurs can make use of before the entrepreneurs have decided what goods
or services they will try to sell and what methods of production they will try. Decisions about
most training are best made by the entrepreneurs" (p. 150).
So much for what Mr. Phelps thinks will not be successful. His own proposal has the merit
of simplicity: he favors wage subsidies to employers who hire the unskilled.
At first glance, this sounds like just another interventionist panacea; but closer examination
shows, I think, that our author's proposal may readily be taken in a way consistent with the free
market. Mr. Phelps is perfectly willing to have the subsidy take the form of a remission of payroll
taxes. Further, though he himself favors a graduated program of subsidies-the higher your wage
before the subsidy, the lower your subsidy-he also thinks that subsidies for all workers would be
beneficial. This cuts out governmental efforts to direct the proportion of skilled to unskilled
Translating this latter version of the proposal into a payroll tax remission, what our author
says comes to this: if the government reduces taxes on wages, wages will tend to rise. Mr. Phelps
has, with a roundaboutness that would do credit to Rube Goldberg, arrived at a free-market
It would, of course, not do to end on a note of praise for an economist who rejects
laissez-faire. Let us note, then, that like John Rawls, whom he here follows, Mr. Phelps gives no
argument for his view that fairness demands that the surplus generated by economic cooperation
benefit the least well-off to the greatest extent possible.