Welfare Recipients and The Law of Diminishing Marginal Utility

Question - Are welfare recipients more sensitive to the Law of Diminishing Marginal Utility than the general populace?

Response - I don't believe any one person is necessarily more or less sensitive to the Law of Diminishing Marginal Utility than any other person. The application of the law towards the observation of human behavior (in order to determine what one is doing and why) is not so much an issue of degree of influence as it is one of simple cause-and-effect.

First, I will provide a brief explanation for those unfamiliar with the Law of Diminishing Marginal Utility, or the Law of Diminishing Marginal Returns.

This law states that a person will only consume a good, seek a service or engage in an activity until his utility (satisfaction) is maximized. Once he is sated, he will seek out other avenues to gain more utility. Also, with each unit of the good consumed, he gains less utility than he did from the unit consumed before. For example, if you've been outside on a hot summer day performing yard work, when you come inside and have a cold glass of water, it is refreshing and provides you with a lot of satisfaction. You may desire a second glass, but the second glass does not provide you the same satisfaction as the first. You will stop drinking glasses of water once your thirst is sated. Your utility will have been maximized at that moment with regard to thirst.

Before I directly address the application of the Law of Diminishing Marginal Returns on welfare recipients, I feel I must explain some assumptions economists make about human nature and why people work.

From Adam Smith (Division of Labor) to Ludwig von Mises (Disutility of Labor), the history of economic theory has been founded upon a handful of generally accepted assumptions regarding people. The most important in this case is the assumption that a person will generally seek the most benefit for the least possible effort. Economists believe this is an important motivator for innovation. Every time an easier (more efficient) way of doing things is discovered, wealth is created. Time and energy are liberated from the prior task and now made available for other tasks. One of these available tasks is leisure.

Why do we work? Work must be done for life to be maintained. At the very least, we need food and water, along with clothing and shelter to protect us from the elements. Where does all of this come from? It does not get presented to us from a benevolent Spirit or kind Mother Nature. All of this must be created, built, and/or harvested by the labor of man. Work is necessary. However, if we could be provided for without having to labor, would that be preferable? Generally, yes. Each individual possesses physical needs (food, shelter, clothing, water, air) and physical, emotional and psychological desires. The degree to which that individual wishes his needs and desires met influences how hard he is willing to work and how much time he is willing to devote (school, on-the-job training, apprenticeship, etc.) to learn how to best obtain what he needs and desires. So, we've reached a subjective fork in our road. What does the individual want? And, how hard is he willing to work for what he wants? How much does he value leisure versus the potential fruits of his labor? If he feels the price of obtaining what he desires is too high, he may only be willing to work as hard as he needs to in order to obtain what he needs to survive and then devote the rest of his time and energy towards leisure.

So, what does this have to do with welfare? Allow me to present a simple example.

Let us suppose that the most efficient labor I am able to provide to any employer is $8 of wealth-productive capacity per hour. There is no incentive for any employer to pay me more than $8 per hour for this task - if he did, he would be losing money. Let us suppose I am being paid $7.75 per hour for my labor. I am receiving $7.75 for my time (8 hours per day, 5 days per week), my physical energy and my mental effort.

Now, let us suppose I lose my job during a recession. I apply for welfare and receive what amounts to $6 per hour, with no requirement to find new work. I am now being paid for leisure nearly 78% what I was previously being paid to work. I may decide my time, my physical energy, and my effort are worth more applied towards leisure than towards the extra $1.75 I might command in the market. If the value of the work I used to provide has declined due to a decrease in demand for the good or service I used to provide, I might even find that I am receiving more in leisure than I could command in the market.

I will only have an incentive to leave welfare and reenter the market if I deem the return on my investment of time, energy and effort is worth their expenditure. 

Even if the market improves and I can command a higher wage now than I did before, I will only have an incentive to leave welfare and reenter the market if I value some combination of desired goods and services I can obtain through higher wages earned more than I do my current state of leisure.

This does not make me greedy, stupid or lazy. It makes me human.

If ever a politician truly desires to slim the rolls of entitlement projects, he must seek to make welfare less attractive than working. He must seek to make the return gained from leisure less attractive than the potential return gained from earning wages.

Does this adequately answer your question? Please feel free to ask any follow-up questions or clarifying questions you desire.