This is a timely topic given the ongoing debate over raising the debt ceiling. John Cochrane, one of my favorite economists, has a very nice discussion of this at his blog that is a must-read for anyone wanting a comprehensive approach to the problem of welfare and work requirements. Here are some excerpts, but be sure to read the whole thing:
The debate over work requirements for social programs is hot and heavy. I'll chime in there as I don't think even the Wall Street Journal Editorial pages have stated the issue clearly from an economic point of view. As usual, it's getting obfuscated in a moral cloud by both sides: How could you be so heartless as to force unfortunate people to work, vs. how immoral it is to subsidize indolence, and value of the "culture" of self-sufficiency.
Economics, as usual, offers a straightforward value-free way to think about the issue: Incentives. When you put all our social programs together, low income Americans face roughly 100% marginal tax rates. Earn an extra dollar, lose a dollar of benefits. It's not that simple, of course, with multiple cliffs of infinite tax rates (earn an extra cent, lose a program entirely), and depends on how many and which programs people sign up for. But the order of magnitude is right.
Since 1967, average inflation-adjusted transfer payments to low-income households—the bottom 20%—have grown from $9,677 to $45,389. During that same period, the percentage of prime working-age adults in the bottom 20% of income earners who actually worked collapsed from 68% to 36%.
The Foundation for Government Accountability [estimates] that there are four million able-bodied adults without dependents on food stamps, and three in four don’t work at all. Less than 3% work full-time.
It's much more efficient to get people to work by saying "if you earn a dollar, you can keep it," rather than "if you earn a dollar we'll take it away from you but we're going to force you to work."
Is there a better way? I've long played with the idea of limiting help by time rather than by income. That's how unemployment insurance works.
Another wild idea: Good economists all understand that consumption, not income, is the right measure of well being. That's why consumption taxes are a good idea. One advantage of a consumption tax is that it would be easier to condition benefits on consumption rather than income. If you work and save the results, you can keep your benefits.