Any social transfer increases the net value of being in the condition that prompted the transfer.
The second law in Losing Ground (1984). Murray argued that American welfare rules of the 1960s and 1970s made unemployment and single parenthood less costly relative to work and marriage, and that both rose as a result. The claim became central to the debates that led to the American welfare reform of 1996.
In practice
- A disability benefit that stops entirely on a return to work makes trying a job a financial gamble.
- A child who gets extra attention whenever he is ill learns, without anyone intending it, that illness pays.
- Possible explanations
- One explanation is incentive: anything that lowers the cost of a condition makes it slightly more attractive at the margin. Another is that transfers are conditioned on the very state the programme hopes to reduce.
- In its favour
- Consistent with basic price theory and with the income-maintenance experiments of the 1970s, in which a guaranteed income reduced hours worked. Programme designers widely accept the need to limit such effects with tapers and work requirements.
- Against it
- Ellwood and Summers showed in 1986 that real welfare benefits fell during the 1970s while single-parent families kept increasing, which cuts against the causal story Murray told. Measured behavioural responses are often small, and some transfers improve long-run outcomes.
- Standing
- The mechanism is widely accepted; its size and Murray's account of American welfare history are disputed. Compare the cobra effect.
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money