THE ADMINISTRATION has been urging states to require people receiving welfare benefits to work without pay in order to continue receiving benefits. To help find jobs for the recipients, the Department of Health and Human Services proposed employing some of them in Social Security and other federal offices. Now it appears that a federal law barring employment without pay may prevent the federal government from doing what it is urging upon states.

Perhaps a way can be found around the law or, as the administration is urging, Congress can change it. But it's worth exploring why this law and similar prohibitions in labor contracts exist and what they imply for welfare policy. Congress prohibited "volunteer" labor in order to limit agency activities to the scope intended for them and to keep them from incurring obligations to people who might later sue for pay. Implicit in the law is the notion that government ought to pay a fair wage for the work it wants done.

Workers' groups, of course, favor rules like this because they keep employers from undercutting their wages by bringing in people (illegal aliens or welfare recipients) who can be intimidated into working for little or nothing. That is not only a self- serving concern. The free enterprise system is successful precisely because it relies upon economic incentives to motivate its workers. It also prospers because it ensures that most workers have enough money to buy the goods of industry and can thus fuel economic growth.

This is not to say that welfare recipients should not be encouraged to work. The notion that mothers with small children, the typical welfare adults, are "unemployable" has been outmoded by the soaring labor force participation of such women and the increasing realization that society does them no favor by isolating them from the labor market. A group of black leaders and scholars has just called for an overhaul of the welfare system to emphasize efforts to help recipients become truly self-supporting.

Virginia's Human Resources Secretary Joseph Fisher was quite right when he pointed out to a group of antipoverty workers recently that no job is demeaning in itself. Starting workers can learn useful work habits and self-respect at the simplest tasks as long as they know that what they are doing is useful and appreciated and if doing the work enables them to provide decently for their families. But a mother trying to raise a family on the $310 a month that Virginia's welfare provides is not likely to learn much about the value of work in America when pushing a broom brings her nothing but a sore back in return.