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The welfare trap is said to work as follows: A person on welfare finds a part time job that will pay them a minimum wage of five dollars per hour, eight hours per week (for example). The forty dollars they earn will be deducted from their welfare payments leaving them with no net gain. There is often even a net loss as the government will tax that forty dollars, leaving the person worse off. There may also be extra child-care and commuting costs. For doing eight hours of work productive to society the person is now worse off than they were before. Since entering the work force often begins with jobs such as these, the welfare trap contributes to permanently excluding a section of the population from the work force.

There have been a number of solutions proposed to this problem. Typically, they involve lowering taxes on the poor, and/or not deducting small wages from welfare checks, thus allowing a person on welfare who finds a part-time minimum wage job to make a net gain.

More radical solutions have also been proposed. Some people advocate dramatically cutting welfare payments or eliminating them entirely, but this would leave the very poor no protection from starvation and death, therefore it arguably creates a bigger problem than it solves. Other schemes are the guaranteed minimum income and a negative income tax.