Low Wages Cost Taxpayers Over $100B a Year

Most people picture government assistance as a check that goes to someone without a job. The data points elsewhere. The claim that a living wage saves taxpayers money rests on a simple fact: a large share of public benefits goes to households where someone already works, often full time. Employers pay a wage that does not cover rent and groceries. The public covers the rest.

Here is where that money goes, who receives it, and what changes when pay rises.

How do low wages end up on the taxpayer's bill?

Through the programs designed to catch people the labor market drops. A worker at $7.25 an hour earns about $15,000 a year before taxes, which sits below the federal poverty line for a family of two. That worker qualifies for SNAP. If a child is in the house, Medicaid or CHIP often applies. At tax time the Earned Income Tax Credit adds a refund, a credit the federal government spends tens of billions of dollars a year on (IRS).

Each program does what it was built to do. Together they function as a wage subsidy, paid by the public, that flows to the employer's benefit by making a low wage survivable. The UC Berkeley Labor Center has tracked this for years and puts the combined cost of Medicaid, CHIP, SNAP, the EITC, and TANF for working families well above $100 billion annually.

Do people who receive benefits actually work?

Many do. KFF reports that roughly six in ten nonelderly adult Medicaid enrollees hold a job. USDA data show that most SNAP participants who are able to work are employed in the year they receive benefits. The benefit goes to people who work and still fall short.

The EITC deserves its own note. It is a pure wage supplement, available only to people with earnings. Its popularity across party lines reflects a shared view that work should pay. It also shows how much of the support system already assumes wages will fall short.

What happens to public spending when pay goes up?

Three things change, and they point the same direction.

First, some households climb above eligibility cutoffs and leave benefit rolls. Second, workers with higher pay pay more in income and payroll taxes. Third, employers carry more of the labor cost directly instead of passing it to the public.

The Congressional Budget Office has run these numbers for federal minimum wage proposals. Its 2021 analysis of a $15 minimum wage found that about 17 million workers would see higher pay and about 900,000 people would move above the poverty line, alongside a projected loss of about 1.4 million jobs in its central estimate. Both sides of that ledger belong in the conversation. The loss estimate is real, and so is the earnings gain, which is why the debate continues in the case for and against a higher floor.

That gap is the subsidy. Every hour between $7.25 and what rent, food, and transportation really cost must come from somewhere: a second job, a credit card, a food bank, or a public program.

Is this really corporate welfare?

The label is fair when a single large employer's workers show up in benefit enrollment at high rates. We cover that argument with its evidence in how taxpayers subsidize low-wage employers. The more general point holds regardless of any one company: when wages do not cover basic costs, the shortfall becomes a public cost. A taxpayer in a state with generous benefits pays more, and a taxpayer in a state with thin benefits sees the cost land elsewhere, in emergency rooms, evictions, and unpaid medical bills.

Who pays when wages fall short?

You do, through taxes. Workers do, through hardship. And local economies do, because a paycheck that goes to rent and a food bank does not circulate through a main street. The ledger on working full-time and still needing assistance shows how common this has become, and whether automation would erase the gains is the objection most often raised in response.

None of this argues that safety-net programs are bad. They keep families fed and insured. The argument is that a country can pay for them after the fact, indefinitely, or it can set wages high enough that fewer households need them. Our stats page tracks how far apart wages and costs have grown.

What does the cost look like at the household level?

Stack the programs on one family and the pattern is easy to see. Take a single parent with one child working full time at $7.25 an hour, about $15,000 a year before taxes. Under typical state rules that household may qualify for SNAP, Medicaid or CHIP for the child, and an EITC refund at filing time. Each benefit is modest on its own. Together they raise the household's resources enough to keep the lights on, and they carry a public price tag.

Now run the same job at a wage near the MIT Living Wage Calculator's estimate for a single adult with a child, which is well above $30 an hour in most of the country. The family keeps working. It owes more in payroll and income taxes, qualifies for fewer programs, and relies less on public spending. The job did not change. The wage did.

The point is not that every household would leave benefits. Many would still qualify for something, and some benefits phase out gradually by design. The point is the direction of the fiscal flow. Higher pay moves cost off the public ledger and onto the employer's, which is where economists have long argued labor costs belong.

There is also a timing issue worth naming. Benefits are paid when a family hits a wall: a rent notice, an empty pantry, a sick child. Wages arrive every pay period and prevent the wall. Prevention is cheaper than rescue, which is true in health care, housing, and nutrition alike.

A wage floor frozen since 2009 did not save anyone money. It moved the cost of low pay from the payroll line to the tax line, and the public has been paying the difference ever since.