From the mid-'70s to the early '90s there was evidently a marked collapse of the demand for low-skill labor in the economically advanced Western countries. There was a visible widening of the gap separating the lowest pay rates from average pay rates and a steep climb of jobless rates among the least educated in both the U. S. and the U. K. In some European nations labor-market laws or practices blocked a fall in wages at the bottom, but that made unemployment among the least educated rise more. The technology-driven investment boom that lifted the U.S. economy and a few others in the mid-'90s brought relief to low-wage workers, but it was inevitable it would cool down as new capacity was put in place.

Responding to this collapse, several economists -- Layard and Jackman, Phelps, Fitoussi, Dreze and Malinvaud, among others -- proposed in the '80s and early '90s that the government meet the problem in a constructive way. They appealed for tax-subsidy programs that would raise the demand for low-skill labor, thus pulling up pay and employment in the lower reaches of the labor market. Many laymen were sympathetic: better pay people for working than hand them "welfare" for not working. Yet many believed it unlikely that welfare-state entitlements could be cut back enough to finance a large, general subsidy to low-wage work. The middle class, many of whom were prepared to soak the rich, did not see any argument for reaching deeper into their pockets for added taxes to pull up wages and jobs for the working poor. (A highly selective program that grew up in the 1980s and 1990s - the Earned Income Tax Credit in the U.S. and the Family Credit in the U.K., through which the government supplemented the pay of selected wage earners - was restricted to low-income parents of dependent children so they would not receive more public money in the "welfare trap" than they would make working.)

A justification for a wage subsidy, or employment subsidy, at the low end of the market is developed in Phelps's book. He begins by observing a deficiency in what he calls economic inclusion and pinpointing its sources. In the advanced Western economies, many are effectively left out of the business sector - they cannot continue very long on the pay available, or the pay is so little that they become too distracted or demoralized to make good employees and lose their jobs, or minimum-wage laws make them unaffordable to law-abiding employers; so they have to adopt other ways of supporting themselves. Further, his argument goes, in the American economy and others with genuine private enterprise, the stimulation, problem solving, and creative interaction that the business sector provides are the chief source of personal development for most of the participants. Therefore, the inability of many able-bodied and competent people to gain inclusion in this sector is a serious matter. For those left out, it is a deprivation of a basic right - as if they were confined to camps where they couldn't realize their potential. For the rest of society, it is a source of social costs, as those not included sink into drugs, crime, violence, prison and dependency. And for the private enterprise system, it is exhibit A in the populist attack. For any or all of those reasons, the active, adult public -- benefiting from the enterprise system, burdened by the social costs and subscribing to the principles of wide opportunity and self-support -- can see it would be in their interests to pay a significant sum for a major amelioration of these conditions. Fortunately, the federal government can do much to ameliorate these conditions by paying the business sector for its employment of low-wage workers in order to expand the jobs open to them and to pull up their pay rates to self-supporting levels.

By now, this view has been attacked from quarters on both the left and the right. For free-market economists, from Jack Kemp to Jeffrey Sachs, subsidies are generally anathema and they make no exception for a subsidy to low-wage labor. They believe that the only justice the less productive workers are owed is exemption of earnings below a certain level from income and payroll taxation. In the language of economics, the free-market school is averse to a total reward, private plus public, to any kind of labor or land or capital in excess of its marginal product (i.e., what one more unit of input would add to output).

As Phelps sees it, however, this policy approach rests on two errors. First, the free-market approach overlooks an insight of progressives early in the 20th century and built on by John Rawls. It is that the diverse participants in a nation's labor force, in collaborations and exchanges with one another, increase one another's productivity: As a result, there is a mutual gain from economic cooperation on top of whatever each type of talent could produce independently of other sorts of talents. Society can leave this gain distributed the way the free market would; or it can direct it heavily to the less advantaged - redistributing it so some get more than their marginal product, others less. And since the least equipped workers face morale problems that lower their wages and erode their employability, it makes sense to deliver the mutual gain redistributed to them in the form of subsidies per amount worked in order to encourage greater self-support from work and greater employment on their part. Second, it is cost-inefficient for the government to set marginal tax rates on low incomes equal to zero, since that means the whole population pays no tax on the first ten or twenty or whatever thousand dollars of earnings they have. In contrast, the low-wage subsidy would go only for employment of workers with low wage rates.

On the left, in the more extreme quarters, the subsidy proposal is also strongly opposed. It is seen as a cosmetic measure aimed at deflecting some of the attack on capitalism and it is criticized as arbitrarily implementing bourgeois views about values over alternative views of the good life. Moderates on the left, without condemning the subsidy proposal, favor one or another alternative proposal. One of these counterproposals is the idea of a big "stake," or grant (faintly reminiscent of the 19th century land grants), to be awarded to each citizen on reaching age 18, an idea introduced by Bruce Ackerman and Anne Alstott in The Stakeholder Society. Another alternative is the classic scheme of a "basic income" for life, recently argued for by Philippe van Parijs in the Boston Review and the book What's Wrong with a Free Lunch? With such a stake or lifetime income stream, those who have grown up disadvantaged would for the first time have to some degree the "freedom" to choose the life they most admired, as the wealthy have.

In Phelps's perspective, however, the benefits of such policies would be far outweighed by the hazards. It is unrealistic to suppose, which the proponents of these plans tend to do, that this added wealth would so empower the less advantaged that they would obtain higher wages from employers. Absent subsidies, most employers cannot afford to pay more without a critical loss of their competitiveness. The recipients could benefit by consuming more or, instead, accepting more attractive though lesser paying jobs, of course. Yet it is debatable how much economic inclusion would be served. In any case, these programs would carry the risk that low-wage workers would also exercise their increased freedom to quit their jobs more readily, to search less intensively for a new job, to devote themselves less to their jobs and their advancement, and even to opt out in favor of alternative life styles. If so, these plans would do more to reduce the employment of less advantaged workers than to increase it. Certainly it is not a solution to the problem of inclusion to draw those not well integrated in the business world out of the labor force into a life offering little stimulation, challenge, accomplishment, self-respect and personal growth.

The wage subsidy expands employment and boosts paychecks at the low end of the labor market. It is feasible, even cheap, to administer. It operates to subsidize and thus further reward and encourage behavior the wider society values --namely, working in the nation's business. It integrates the law-abiding poor into the fabric of the society by making their enlistment in the business sector in the self-interest of all parties. It deals with issues of fairness without being in any way moralistic or intrusive into the private lives of the subsidy recipients. Such a subsidy can generate support from both the right and from the left. A wage subsidy would allow America to be more visibly and more thoroughly what the country has generally been, a "city on the hill" for the rest of the world. Its adoption would demonstrate to the world that an enlightened and resourceful capitalism can aim explicitly for justice as well as dynamism and efficiency, and achieve them all.