Edmund Phelps has won the Nobel Prize for Economic Science

Edmund Phelps has won the Nobel for economics. This is a great choice because Phelps is a great thinker on some pressing economic and social problems.

Here's an execerpt of my review of his 1997 book on wage subsidies, Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise.

Phelps writes, "Low-wage employment subsidies, their imperfections notwithstanding, are the most effective instrument we have available to re-create lost opportunities for work and self-support, to restore inclusion and cohesion, and to reclaim responsibility for oneself and others."

It would work as follows: A firm that pays an unskilled employee $4 per hour would receive a subsidy, to wit, a matching grant of $3 per hour from the government.

This would raise the gross wage rate to $7 for the employee. On a similar schedule, if an employer pays an hourly rate of $6, he or she would receive a subsidy of $1.65 which would bring the gross wage to $7.65, and so on. The subsidy would cut off after $12, at which an employer would earn only six cents in subsidy. Under Phelps' plan, the subsidies would be applied against payroll and profit tax liabilities.

The purpose of the wage subsidy is to draw unskilled laborers into the work force, expand their job opportunities with new work incentives, and, above all, lift the living wage of the unskilled. Phelps is convinced that his medicine is worth the cost of approximately $125 billion. It would require, among other tax measures, the elimination of the Earned Income Tax Credit and federal training programs that do not elevate the working poor's income.

In the long term, this subsidy would produce a net positive gain for taxpayers who would see less welfare and less spending on the criminal justice system. One of the direct benefits of the employment subsidy is that it would "shrink welfare's 'market share'."