The Paradox of Welfare

Amidst all the possible mechanisms that are used to tackle the problem of poverty, almost everyone would agree on the importance of welfare programmes implemented by governments all over the world. These programmes take the form of subsidies provided by the government for necessities like housing, food, energy and healthcare.

But critiques of these poverty alleviation programmes have pointed out the ironic effect they have on people struck in poverty. This phenomenon is known as the ‘welfare trap’. Here’s how it works. The governmental assistance is provided to people who are unable to find work and whose income falls below a particular level. The benefits are then phased out when they enter the job market and their income crosses the threshold level. Now, since people in poverty are also rational actors, they are disincentivised from taking up work even when they are able to, when they realise that there is no net benefit that they gain from working. This happens since the jobs they get are low-paid ones and the opportunity cost of taking them up is too high for them to leave their dependence on governmental assistance. Hence, in the short-term, the people do not essentially get better-off upon finding employment and thus, prefer to remain in poverty. Moreover, the government is unable to differentiate between people who are actually unable to work and people who are not willing to work due to their dependence on welfare. In addition to having detrimental effects on the people below the poverty line, this phenomenon adversely impacts the government too. Since this system makes people wishful of maximising state assistance, it makes a huge amount of government spending wasteful. So, not only a large chunk of government expenditure is going into non-developmental spending but it is also leading to the failure of the government in achieving the goal of social welfare. All in all, since less and less people take up new jobs, the whole economy stands at a loss. Ironically, its cause being the very policies designed to battle poverty. Although there has been a lot of deliberation regarding the possible solutions to welfare trap, the most popular idea being debated around the world today is that of a ‘Universal Basic Income’. What exactly is it? Has it been implemented anywhere? What about its feasibility and efficiency? Stay tuned to know more.