You have probably heard people say that “it should be worth our time to work”. This is true even in Norway, where we like to believe that we also take care of people who have ended up outside the workforce, whether involuntarily or not.
“This is what we call the ‘work incentive principle’. Basically, there should always be a financial advantage to working instead of receiving unemployment benefits,” said Roberto Iacono, an associate professor at the Norwegian Univeristy of Science and Technology (NTNU’s) Department of Social Work.
Iacono has studied what happens when both the minimum wage and welfare benefits are very low. The results have been published in PLOS.
Striking a balance
Many countries have a minimum wage designed to encourage more people to stay in the workforce.
One advantage of the work incentive principle is that more people who are able to do so continue to work. Economically speaking, this is good for society as a whole.
An obvious disadvantage of the principle is that people who simply cannot work due to health reasons fall behind financially.
In many developed countries, the challenge is to strike a balance between what is best for society and taking care of the vulnerable.
So, how do we find this balance? One thing is for sure – the minimum wage cannot be too low.
People leave poorly paid jobs
It can be tempting for many employers to offer low wages – even the minimum wage, if possible. But if the minimum wage is very low, this strategy may not work very well – especially if the aim is to have as many people in the workforce as possible.
If that’s the case, potential employees will simply feel it is not worth the effort.
“The work incentive principle no longer works when both the minimum wage and welfare benefits are so low that the financial return from both approaches is close to the subsistence level,” Iacono said.
Iacono finds that the benefits of working must be more attractive than those of receiving welfare support – especially if both pay and unemployment benefits are very low.
People who are able to work need to earn more from working than what is merely necessary to survive. If they can’t, they opt for unemployment benefits instead.
“For the principle to apply, the minimum wage must be consistently above the subsistence level,” Iacono said.
Important contribution
A number of countries have a minimum wage that is so low that having a job is almost not worth it.
Iacono’s findings show that this is not a sustainable path to take – or at least not if the goal is to ensure that as many people as possible are active members of the workforce.
“I believe these findings make an important contribution to the minimum wage debate in developed countries that also offer welfare benefits to their citizens,” said Iacono.