The case for universal social safety net for job creation

The Times points to a new study from the US which highlights how the tax-payers subsidize low-wage paying employers,

Poverty-Level Wages Cost U.S. Taxpayers $152.8 Billion Each Year in Public Support for Working Families... state and federal governments spend... on four key antipoverty programs used by working families: Medicaid, Temporary Assistance for Needy Families, food stamps and the earned-income tax credit, which is specifically aimed at working families... Taxpayers pick up the difference, he said, between what employers pay and what is required to cover what most Americans consider essential living costs... About 48 percent of home health care workers are on public assistance... So are 46 percent of child care workers and 52 percent of fast-food workers.

This carries important lessons for India, where nearly 90% of the employment is in the informal sector, with all its inefficiencies. These are predominantly low-paying jobs and covers all sectors - construction, services, manufacturing etc. An important reason for such pervasive informality is the high cost of going formal. Mandatory contributions to pensions, insurance, and so on make labor prohibitively expensive for most employers. 

The overwhelming majority of the recipients of the (informal) market determined compensation get just about subsistence wages. Since it does not cover the requirements of secondary and tertiary health care, children's education, old-age pensions, etc, they have to fall back on public systems. But our social safety nets are both too weak and inadequate to meet this demand. Mandatory contribution requirements are legislated to cover this deficiency.        

The government therefore faces a dilemma. Whereas not making contributions mandatory would be politically incorrect, especially when public systems cannot satisfactorily meet all social safety responsibilities, doing so would be the surest way of driving more employment underground. This can be resolved only with a basic universal social safety system that covers atleast all the essential requirements for a dignified life - assurance against catastrophic life illness, scholarships for children to pursue higher education, and old-age pensions. 

Apart from this, as I have blogged on several occasions, a universal safety net also provides the political cushion to push through several important labor, taxation, subsidy, and liberalization reforms. The biggest obstacle however is that the government is fiscally strapped to finance such a program. In the circumstances, the best strategy is to consolidate existing social safety interventions and gradually expand their scope and coverage.