There are a number of conventional reasons for providing assistance to low-income individuals. Potential externalities are associated with high crime, poor health and cultural deprivation. In any case, there are equity arguments for redistribution. Phelps in chapter 7 introduces a third class of arguments. He claims, on the basis of an efficiency wage model, that significant labour market inefficiencies can be lessened by appropriate assistance to the low paid. This third rationale is important, not just in strengthening the case for assistance, but in indicating the appropriate methods.

Typically, if we are concerned about income distribution, we would introduce a benefits scheme rather than intervene in particular markets. Agricultural subsidies are the classic example of the problems associated with market intervention as a method of raising incomes. Phelps' particular focus is on the low paid in employment, as well as on the employed in this low-skills market. Schemes such as Family Credit in the UK have been introduced precisely to help out those in employment but on low wages. The advantage of a straightforward benefits scheme is that it can be targeted. Low-wage individuals may have alternative income sources, assets (such as a house), be part of a family group that has sufficient total income, and have differing needs, depending (for example) on the number of children. Since it is expensive in efficiency terms to raise revenues from taxation, targeting of benefits is important.