Why Subsidies Are Bad for Wages

As a case from 18th century Britain shows, subsidizing the working poor with entitlements makes it all but impossible for them to work their way out of poverty

National Archives

In 1793 Britain was at war with France. War crippled the flow of agricultural products to England from Europe and this, combined with a poor harvest, forced skyward the price of food -- bread in particular. To ward off food riots, the magistrates of the small Berkshire village of Speen agreed to supplement the wages of day laborers, scaling the subsidy to the price of bread. The higher bread prices climbed, the greater the subsidy. 

The so-called "Speenhamland" laws, wildly popular at first, were quickly adopted throughout the south of England. But there were problems. Among the most serious of these was that wealthy land owners had no incentive to raise wages. Indeed, under the Speenhamland scheme, wages dropped ever lower as subsidies, paid by taxpayers, grew ever higher. Eventually, some landowners were paying next to no wages, transforming farm workers from independent agents to wards of the state.

"In the long run, the result was ghastly," wrote political philosopher and economist Karl Polanyi, in his 1944 classic  The Great Transformation .

The Speenhamland fiasco has great resonance today. Wages for most of us have been stagnant for years: one in four Americans is earning less in real terms than did minimum wage earners in 1968. Like the farm workers of Speen, American low wage workers are subsidized: with food stamps, housing, health and child care and other supports. But while in Speen the land owners paid their fair share of taxes, many of their modern day counterparts do not.  

The outcome of the Speenhamland law, Polanyi wrote, "was merely the pauperization of the masses, who almost lost their human shape in the process." In essence they became ghosts, dependent on government largess to feed their families. They had no control over their lives, and no motive to work harder -- or better. Subsidizing the working poor with entitlements, rather than passing legislation that guarantees a living wage, makes it all but impossible for them to work their way out of poverty. The good people of Speen recognized that, and repealed the law in 1832. Maybe it's time we too took a hard look at the entitlements propping up not the low wage workers, but the industries that employ them.  

I look forward to your thoughts.