It's late but to take a stab at it, the problem is you're reducing the marginal benefit of labor over non-labor to workers. This is grossly simplified, but for illustration, suppose I can have $0 a year while not working and $12,000 for working, that's mediocre but tolerable for me the worker. The marginal benefit of my work is $12,000. If you say I can have $5,000 while not working, then the marginal ("additional") value of working is now only $7,000, roughly half. I'm putting in the same amount for work for roughly half the benefit (compared to doing nothing) as before. If I could choose to take partial hours on welfare hourly during the day, there would be a substitution effect (aka I would work fewer hours) as the relative benefit of labor over leisure has decreased. If I think the welfare program is all-or-nothing (the way politics frames it sometimes) and I'm not going to drop out of the labor market to become a bum, I will keep working but feel worse off as I have to keep working the same hours for a reduced benefit, aka you've screwed up my existing labor-leisure equilibrium and reduced my producer surplus as a worker. When you add in the effects of inflation (especially in the low-end products I buy) and whatever net-taxes I pay to support others, I am worse off in both utility and purchasing power.

Marginal cost works similarly. Suppose you know you're going to buy pasta and think you can buy a $9 pasta box or a $7 pasta box, and plan to buy the $9 box because you think the additional $2 is worth the taste. You get to the store and find the lesser pasta is only $5. You buy the $9 pasta but feel worse off than you anticipated because the marginal cost of that extra taste is double what you planned. Essentially, your consumer surplus in the market for premium pasta has been reduced because your demand curve has contracted following the lower price of an imperfect substitute good (the inferior pasta)