Chapter 12 Poverty and Welfare Two ways

Chapter 12 Poverty and Welfare • Two ways to measure poverty: – Absolute terms: in poverty if income threshold – Relative terms: in poverty if income is population average • U. S. : absolute poverty measurement: – Developed 40 years ago by Molly Orshansky – Steps: • 1) calculate $ to buy nutritionally adequate diet for a year • 2) multiply above by 3 (assumes food is 1/3 of budget).

Absolute Poverty Threshold • Varies by family size/type. • Does not vary geographically or city versus rural area. • Yes adjusted annually for inflation using CPI. • Based on pre-tax income and does not include any noncash benefits like Medicaid or EITC. • Examples: – Traditional family of four: in poverty if family Y $17, 690 in year 2001. – Single mom with two kids: in poverty if family Y $14, 269. – Note: Year-round full-time at minimum wage = $10, 300.

Criticisms of Absolute Poverty Threshold • Too high: – Ignores Medicaid, EITC • Too low: – Food spending really ¼ not 1/3 of family budget and if so, should multiply food expenditure estimate by 4 not 3. • Based on food budget associated with minimal quality diet.

Who is in Poverty? • See Table 2: – Poverty by race and family structure. • See Table 3: – Poverty rate by type of family head. • Summary: high poverty rates can be traced to families headed by women and particularly by minority women. • Further details: – Extreme poverty: 15% of AA kids live with family Y ½ threshold – Poverty rate is cyclical: peaks right after recession. – Rate fell throughout most of 1990 s but rising since 2001. – Poverty rate will likely grow as economy on edge of second recession.

International Comparison • Report by UNICEF in 2000: – US poverty rate at 22. 4%; – US rate is highest rate of most industrialized nations. • Compare: – Sweden: 3% – France: 8% – Germany: just 10%.

Determinants of Poverty • Female HH heads have always been poor but now more of them. – Why? • divorce rates; • out of wedlock births. • Why low income? – Most single heads are women who have lower income than men. – Low earnings due to: • Low individual market productivity: • Poor education; • Limited L mkt opportunities (not enough low-skilled jobs; discrimination); • Culture of poverty? (controversial)

More on Poverty • Poverty rates by education for persons in LF 27 weeks + 1998: – – Less than HS degree: 14. 5% HS degree 6. 6%. Some college; 4. 5% College graduate: 1. 4%. • Other causes: random bad luck (costly medical situation; job loss; divorce). – One estimate: among white femaleheaded HH, 72% were not poor prior to divorce. – Majority of women receive no alimony; much non-payment of child support but this is getting better. – Poverty is temporary condition for most.

No-Fault Divorce Laws and the Divorce Rate • Since 1960 s and 1970 s: – Divorce rates doubled. – Laws have made divorces easier. • Did laws cause divorce rates? – Cannot conclude without data. – Most studies find no empirical relationship between the two. – How test? Examine difference in laws/divorce rates across states (like a natural experiment). • One explanation for rising divorce other than laws: – Social attitudes were changing along with growing female financial independence; so laws changed to catch up.

Welfare in US • Social Security Act of 1935 created AFDC. – Means-tested program (eligibility based on income and assets). – Why created? Most single mothers were widows; much sympathy. – Laws changed many times over years. • Why reform welfare? Three conflicting goals: – 1) raise living standards; – 2) maintain work incentives; – 3) control program costs. • Recent changes to require moms to work reflects broader trend of maternal employment.

PRWORA • Personal Responsibility and Work Reconciliation Act (PRWORA) of 1996. – Created TANF: Temporary Assistance to Needy Families. – Biggest feature of this reform: now welfare $$ is in block-grants to state so no longer a federal entitlement. – States have much more control. – 5 year maximum limit on receipt of welfare. • See Table 3: – Change in real value of cash welfare benefit.

Behavioral Effects of Welfare • Extensive literature. – Welfare and work: consensus that welfare reduces work effort. – Welfare and marriage: evidence on this not clear. (one problem: much of welfare caseload in groups with inadequate “pool” of marriageable men). – Welfare and child outcomes: how does welfare reform affect children? • Young kids; older kids. – Welfare and Work Attitudes: • One effect is passing on idea to kids that everybody works. – Welfare and fertility: • Evidence weak that welfare single moms.

Extra Notes: Effects on Kids • Effect on older kids: – Study in 2002: teenagers had lower test scores and higher drop out rates (likely due to reduced supervision). • Effect on younger children: – Good of improves standard of living or care children receive. – Bad of childcare quality is poor.

• Welfare reform and welfare caseloads: – Common knowledge: huge caseloads in 1990 s. – Empirical evidence: about 1/3 to ½ of this reduction due to welfare reform; much due to growing economy. • Earned Income Tax Credit: – EITC started in 1975; expanded much in 1990 s. – Helps in goal of “making work pay. ” – Opposite of welfare: benefit as work; up to a max. – Is refundable: so even if owe no taxes, get the credit. • Other policy suggestions: – improve compatibility of work and family. – childcare funding and quality.